Explain the key characteristics of perfect competition

Perfect competition is a type of market structure. It is the market structure in which there is the highest amount of competition. Perfect competition is characterised by some key characteristics, which include the following: a large number of firms- within this, no single firm can influence the market price, so each firm is a 'price taker'- it takes its price from the intersection of demand and supply in the industry; perfect knowledge- this means knowledge on the price and characteristics of goods is available to all producers and consumers in the market; no barriers to entry- thus, firms can freely enter the market; firms produce homogeneous goods- i.e. all goods are the same.As in other market structures, each firm is also profit-maximising. Within perfect competition, firms may be able to make 'supernormal' profits in the short run; however, as there are no barriers to entry, other potential entrants will see the high profits made by current firms, and thus will enter the industry. As more firms enter the industry, prices are driven down, supernormal profits decrease, and thus, in the long run, each firm in a perfect competition market structure will make normal profits.

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Answered by Laura H. Economics tutor

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