Glossary term
Perfect Competition: Meaning and Definition
Reviewed and approved by Dr. Anamika ShrivastavaPublished Last updated
Perfect competition is a market structure in which many firms sell an identical product and every buyer and seller is a price taker. No single firm can influence the market price, and firms can enter or leave freely. A firm's marginal revenue then equals the market price.
In more detail
Because each firm is small and the product identical, no seller can charge more than the market price without losing every customer. Free entry and exit drive long-run profit to normal. The market produces where price equals marginal cost, so no resources are wasted in the textbook case.
Example
A farmer selling wheat in a large mandi cannot get more than the going price and can sell any quantity at it. If she asked for more, buyers would simply go to other farmers.
Key points
- The demand curve facing a firm is a horizontal price line.
- Profit is maximised where price equals marginal cost.
- With free entry and exit, long-run price equals minimum average cost.
Common mistake
Assuming perfect competition exists widely. It is a benchmark, closest in some farm markets.
Related terms
Where it is explained
This term is explained in Class 12 Microeconomics Chapter 4: The Theory of the Firm under Perfect Competition.