perfect market

« Back to Glossary Index

Perfect competition
In economics and general equilibrium theory, a perfect market is defined by several conditions, collectively called perfect competition. These conditions are:

  • A large number of buyers and sellers – A large number of consumers with the willingness and ability to buy the product at a certain price, and a large number of producers with the willingness and ability to supply the product at a certain price.
  • Perfect information – All consumers and producers know all prices of products and utilities each person would get from owning each product.
  • Homogeneous products – The products are perfect substitutes for each other, (i.e., the qualities and characteristics of a market good or service do not vary between different suppliers).
    Well defined Property rights – These determine what may be sold, as well as what rights are conferred on the buyer.
  • No barriers to entry or exit.
  • Every participant is a price taker – No participant with market power to set prices.
  • Perfect factor mobility – In the long run factors of production are perfectly mobile, allowing free long term adjustments to changing market conditions.
  • Profit maximization of sellers – Firms sell where the most profit is generated, where marginal costs meet marginal revenue.
  • Rational buyers: Buyers make all trades that increase their economic utility and make no trades that do not increase their utility.
  • No externalities – Costs or benefits of an activity do not affect third parties. This criteria also excludes any government intervention.
  • Zero transaction costs – Buyers and sellers do not incur costs in making an exchange of goods in a perfectly competitive market.
  • Non-increasing returns to scale and no network effects – The lack of economies of scale or network effects ensures that there will always be a sufficient number of firms in the industry.
« Back to Glossary Index