Perfect Competition Market: Characteristics, Examples, Strengths and Weaknesses

What is a perfectly competitive market? The definition of a perfect competition market is a market in which there are many sellers and buyers and the types of products that are sold are homogeneous (similar) and there is a demand and supply that moves freely (see also: Understanding the Market ). Some examples of goods sold in perfectly competitive markets are rice, potatoes, wheat, and so on.

Perfect competition (Perfect competition market)  is a marketplace where buyers and sellers can not influence the price of individual goods. Thus, the determination of the price of goods sold in the market is the result of mutual agreement between the buyer and the seller.

The Perfect Competition Market (PPS) is generally opened to bring together many companies that sell the same product even though they are of different quality, but the selling price is equalized according to what has been determined by the market.

The demand that is formed is a reflection of what the buyer wants, while the supply is a reflection of what the seller wants. One example is the large number of small companies where the products sold are of the same type, for example rice, corn, vegetables, wheat, and so on.

Perfect Competition Market According to Experts

Several experts in the field of economics explain the meaning of the Perfect Competition Market, including:

  1. Wilson Wake Up

According to Wilson Bangun (2007), the notion of perfect competition market is the oldest form of market in the world. This form of market is effectively used in a country that needs freedom of transaction for economic actors.

  1. Sadono Sukirno

According to Sadono Sukirno (2005), the definition of perfect competition market is an industry where there are a lot of sellers and buyers, and each seller and buyer cannot influence the price of the product in the market.

  1. Adiwarman A. Karim

According to Adiwarman A. Karim (2007), the definition of perfect competition market is a market where the seller cannot determine the price and can only sell at the price prevailing in the market. Perfectly competitive markets are in their most extreme conditions when sellers simply cannot determine prices.

Also read: Imperfect Competition Market

Features of a Perfect Competition Market

Features of a Perfectly Competition Market via Pixabay.com

Are you a business developer who wants to join this market? It’s a good idea to pay attention to the features of this market in the business world before you go any further.

The characteristics of a perfectly competitive market that we can find include:

  1. Consisting of many sellers and buyers

With the nature of this market, sellers and buyers cannot influence overall market conditions. The interaction between the seller and the buyer is considered a price taker, which causes the price in this market to be datum (the price is fixed regardless of the number of goods sold) because the market mechanism determines the price through the interaction between the forces of demand and supply in society.

Competition in the Perfect Competition Market depends only on consumer interest. Companies that are unable to survive will easily experience losses due to low productivity.

  1. Goods Sold Are Homogeneous

In this market there are rules for selling the same or identical products, so that buyers will find it difficult to distinguish between them. Product sellers come from various companies, which are generally large numbers, so that each company has no influence on the product price or the effect is very small.

Goods produced by a company can be a perfect substitute for goods produced by other companies in all aspects, so that the goods produced are identical or indistinguishable. In other words, even if you buy goods at one company, chances are that the quality and quantity will be exactly the same as another company.

  1. Freedom in opening and closing businesses  (Free Entry and Free Exit)

In a perfectly competitive market, generally there are no difficulties for producers who are members of it to enter and exit. This means that producers or sellers will have no problem if they want to start a new business that is considered profitable, and close their business that is considered to be a loss. It is different from other markets which have an attachment to opening and closing the market because of the agreement letter.

Exit and enter in this case there are two criteria, the first is that the company can easily exit when it experiences a loss when the product being sold is unable to compete with the market or can no longer meet market criteria.

Second, companies may continue to survive in the market because they feel that they are capable of being a company that provides high quality products but at prices according to the market, because companies like these are usually in great demand by buyers.

  1. Seller and Buyer Have the Same Knowledge About the Market

Both the seller and the buyer have the same and clear knowledge of the situation in the market. All events and changes in information in the market that can occur at any time must be known by both parties because they have the same portion in the market, especially for product prices and product quality.

The existence of clear information will increase all transactions in the market without any element of fraud, resulting in the following conditions:

  • Use of all resources to generate maximum profit.
  • All producers sell goods at the same price according to market prices.
  • All consumers buy goods at prices that are in accordance with market prices
  1. The Transfer of Economic Resources is quite perfect

Perfectly competitive markets will have no problem if resources or factors of production are moved elsewhere. This is because basically all production sites have the same, both in the method of manufacture and the process of selling to buyers.

Also read: Monopoly Market

Pros and Cons of the Perfect Competition Market

Boat market via Ulinulin.com

  1. Advantages of Perfect Competition Market
  • There is no competition in this market because the products sold are homogeneous.
  • In a perfectly competitive market, the sellers do not need advertising for promotion.
  • The prices of goods and services sold are determined by all sellers and buyers together and generally prices tend to be stable.
  • Pricing is based on bargaining transactions between buyers and sellers.
  • Sellers and buyers act freely in transactions. The buyer is free to buy whichever item he wants and from which producer he buys.
  1. Weaknesses of the Perfect Competition Market
  • In a perfectly competitive market, there are no funds for research or product development so there is minimal innovation.
  • Buyers experience limitations in choosing goods or services because the products that are sold are the same and have the same quality.
  • Workers tend to receive low wages or salaries.
  • There is often an imbalance in the income distribution of each producer, resulting in a conflict of justice.

Also read: Market Segmentation

Examples of Perfect Competition Markets

One example of this type of perfect competition market is a market that sells a community staple food commodity, namely rice. In the rice market, this market has met the criteria because it has the following characteristics:

  • Sellers and buyers of rice follow the price of rice according to a predetermined price, so they cannot determine the price themselves.
  • The determination of the rice price is the result of a bargaining agreement on the demand for rice in the community.
  • Although there are several types of rice that are sold, the rice commodity market is relatively homogeneous. The price for each type of rice is generally slightly different.
  • In the rice commodity, the number of producers and consumers is equal.

In the rice commodity market there was intervention from Bulog , however in terms of determining the price it was generally stable in accordance with the demand from the public and other factors. In practice, the price will follow the law of supply and demand, that is, the price will increase if demand increases, and vice versa.

Also read:  Understanding Macroeconomics

That is a little explanation regarding the notion of perfect competition market, its characteristics, and its advantages and disadvantages. Joining PPS requires a high level of marketing spirit to compete fairly with competitors who sell the same product. May be useful.

 

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