What is Perfect Competition? - dummies

By Lynne Pepall, Peter Antonioni, Manzur Rashid

Perfect competition is the name economists give to a market with many interchangeable firms, none of which can independently influence the market outcome. This scenario isn’t all that likely in the real world, because it depends on a set of conditions that are unlikely to hold. But some markets do get quite close to approximating perfect competition; of course, many others do not come close.

When they do get close, they bring a number of benefits, which are most likely to go to consumers.

The word perfect means something very specific to economists. Perfect in the sense of perfect competition means that it fully satisfies a set of conditions that economists have placed on the model.

By way of an analogy, economists mean perfect competition in the same way as mathematicians describe a perfect circle as exactly satisfying a set of mathematical conditions regarding curvature.

The term certainly doesn’t mean that in a perfectly competitive market everyone’s always happier. In fact, for producers, a perfectly competitive market may be a difficult one in which to operate, because the forces of competition constrain their behavior.