Steve Bain

What is Perfect Competition in Economics?

The concept of perfect competition in economics describes an idealistic situation that does not actually exist in reality. However, there are plenty of real-life industries that are close enough to the model to make it very useful, and it is should be studied closely by anyone who wants to see the value of free-market economics.

Where free-markets perform worst, it is invariably because of a lack of effective competition in the markets in which they operate. It's actually for similar reasons that governments and the public sector in general is so inefficient i.e., they do not have any competitors to force them to adapt and improve their level of efficiency.

An industry with perfect competition is characterized by three essential component parts, these are:

  • Production of a 'homogeneous' identical product
  • Lots of buyers and sellers, none of whom can influence price
  • No barriers to entry, or exit from, the industry

Arguably we could add 'complete information' about the product to this list, so that buyers and sellers fully understand the product's value and what its specifications should be, but the standard economics textbooks only emphasize the three key components bulleted above.