In the real world, there is no such market as a perfect competition as every firm tries to differentiate its product from others and perfect competition involves perfect homogeneity. Perfect competition occurs where every characteristic of competition is known to the seller and as well as the buyer thus giving all information to the market. Due to the interaction of forces of demand and supply the market price stays for all thus the firms become price-takers and mainly compete on the terms of cost only. This raises the issue of profit maximization and firms in the perfect competition tend to increase their profits by only reducing costs. Further the point that perfect knowledge about the market means that despite of how much a firm produces it will get the same price throughout its production schedule as in a perfect market the average revenue is constant and so is the marginal revenue thus implying that the price elasticity is zero thus a decline or raise in price would bring about no change to the total revenue. In the perfect market, demand tends to stay constant throughout and since the firms are small, increment to the cost will only add up to the loss.
The perfect market is more vulnerable to competition as there are many buyers and sellers. ...Show more