Following are the characteristics of perfect competition:
(a) Large number of buyers and sellers: There are so many buyers and sellers, that no person can influence the price of a commodity in the buyer’s and seller’s market. This means that the individual production of each seller is a negligible fraction of total production. Therefore, none of them is capable of influencing market price.
(b) Homogeneous products : All the firms in the perfect competition market sell homogeneous (identical) products. The products are identical in all respects like size, shape, colour, quantity, design, weight, etc. The products are perfect substitutes of one another. Therefore, cross elasticity of demand is zero.
(c) Free entry or exit of firms : The industry is characterized by the freedom of entry and exit of companies. Companies earn only normal profits in the perfect competition in the long run. In the short term, the firm can also earn unusual profit or loss. This is the reason that new companies are attracted to enter the industry and some companies come out of the industry. Therefore, due to the entry of firms and the freedom to exit, each firm only generates common profit in the long run.
(d) Perfect mobility of factors of production: The factors of production can move easily from one firm to another. Workers can move between jobs and between places. It means mobility of factors from one industry to such another industry, which gives them more remuneration. Factors may shift to other firms, if fair wages are not paid.
(e) Perfect knowledge of buyers and sellers : Firms have complete knowledge about the product market and factor market. Buyers also have perfect knowledge about the product market. In simpler words, perfect knowledge exists with the buyers and sellers regarding market conditions, i.e. price and commodities.
(f) Transport cost is ignored: In a perfectly competitive market, all firms are assumed to have equal competitive power. Hence, the element of transport cost difference is ruled out by assuming zero transport cost. If there is difference of transport cost, the competitive strength of two firms supplying identical goods will not be the same in economic sense.
(g) Price Taker and Quantity Adjuster: Firm are price takers and quantity adjusters. A firm may sell any amount of quantity by accepting the price determined by industry.
(h) Cut-throat competition : Cut-throat competition is present in this market. This is due to competition in the market among the sellers.
