The competition may be the spice of life, but in Economics, it has been more nearly the main dish. It has been a major force in organisation of production and the determination of prices as well as output. Economic theory has accorded commensurate importance to this concept.
Competition implies freedom in economic life. It has been considered as a healthy sign in consumption, production, distribution and exchange. The presence and the pressure of competitive market forces in the modern business units force the producers to produce as efficiently as possible.
Those who are inefficient and not able to cover up their minimum cost of production will automatically leave the market. The more perfect the competition, the more perfect the market will be.
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In economic theory, perfect competition has a meaning diametrically opposite to the everyday use of this term as synonymous to rivalry. The perfect competition means complete freedom in economic life and absence of rivalry among firms.
It prevails, when all the conditions given here are simultaneously present in the market. However, most of these stringent conditions are unlikely to be present in the real world. The real world consists of various imperfections and monopolistic tendencies.
The market is rarely perfect in the actual sense. This suggests that perfect competition is a purely theoretical market form, which is never observed in reality. However, the stock market is close approximation of perfect competition.
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Here, any particular stock is homogeneous, there is no information cost (information is readily available through published prices), free entry and exit conditions for the transactors having insignificant control on price.
Perfect competition has an edge over other realistic and complicated market forms, as it is relatively simple to handle. This kind of idealistic market structure provides a yardstick or a standard against which other more realistic market forms can be compared, evaluated and understood better.
That is why, the whole of the economic analysis starts with the analysis of perfect competition and its assumptions. Perfect competition provides simple and logical analytical tools, which can be used to explain equilibrium determination in other market situations.