Perfect competition

Perfect competition represents a market structure where there are many firms selling homogenous, or identical, products.
It is characterised by free entry and exit of firms, meaning there are no barriers to new firms entering the market or existing firms leaving.
Each firm is a price taker, accepting the market price as given, due to its small share in the market.
All agents in the market have perfect information, which means buyers and sellers have equal access to all relevant information.

Large number of buyers and sellers: In perfect competition, there are so many buyers and sellers that the actions of a single buyer or seller have no effect on market price.
Homogenous product: The product is identical across all sellers making it completely exchangeable with other products.
Perfect mobility of resources: All resources used in production can easily move from firm to firm without any restriction.
No barriers to entry or exit: There are no hindrances or cost that prevent firms from entering or exiting the market.

Perfect competition achieves allocative efficiency where price equals the marginal cost of production (P=MC). It implies resources are being used to produce goods and services that consumers value most.
Productive efficiency is also achieved in the long run where output is produced at minimum cost i.e. Average Cost is at its minimum.
Hence, perfect competition is a pareto-optimal market structure where no one can be made better off without making someone worse off.

Unrealistic assumptions: The concept of perfect competition is based on many assumptions (such as perfect information and homogenous products) which are not completely realistic in the real world.
Lack of innovation: Since profits are normal (zero economic profit) in the long run, there may be little incentive for firms to innovate or improve products.
Inability to exploit economies of scale: Firms in perfect competition are price takers and operate at a small scale. They may not be able to realize cost savings from producing on a large scale.

Perfect competition acts as a benchmark for other market structures. It provides a framework to evaluate other types of markets such as monopoly or oligopoly.
By ensuring that firms are price takers and ensuring allocative and productive efficiency, perfect competition also ensures consumer welfare is maximized.
However, lack of real-world applicability and inability to exploit economies of scale are often discussed as limitations when conceptualizing perfect competition.