Perfect Competition in Economics

Competition, in economics, is conditions that are present in markets where buyers and sellers interact to establish prices and exchange goods and services. Economic competition is the means whereby the self-interest of buyers and sellers acts to serve the needs of society as well as those of individual market participants. Society is served when the maximum number of goods is produced at the lowest possible prices.

The theorectial ideal developed by economists to establish the conditions under which competition would achieve maximum effectiveness is known as "perfect" competition. Although rarely possible, perfect competition, as a concept, provides a useful bencmark for evaluating performance in actual markets. Perfect competition exists when (1) an industry has a large number of business firms as well as buyers; (2) the firms on the average are small; and (3) buyers and sellers have complete knowledge of all transactions within the market. 

The practical significance of a large number of small firms and many buyers is that the power to influence the behavior of the participants in the market is thoroughly dispersed. In other words, no single person or business has the power to dictate the terms of which the exchange of goods and services take place. Market results then are truly impersonal. Under conditions of perfect competition, economists contend, goods and services would be produced as efficiently as possible-that is, at the lowest possible price and cost- and consumers would get the maximum amount of the goods and services they desire. (Wallace C. Peterson)