A market becomes perfectly competitive when the following conditions exist :
1)A Large number of Buyers and Sellers: Both buyers and sellers are in a large number, so that individually neither buyer nor seller is in a position to influence the price. Influence of an individual buyer or seller is absolutely insignificant. They will have to accept the price established in the Market. A single seller cannot increase the price. If he does he will not get buyers. The buyer cannot bargain for a lower price, as there are enough buyers at the prevailing price.
2)Homogeneous Commodity : A Commodity sold in the market is homogeneous, that is, identical in quality and size. A difference of any type would provide an excuse for the sellers to charge a higher price. When goods are homogeneous there is no possibility of charging a higher price by any seller under the pretext of qualitative or quantitative difference.
3)Free entry and exit: There is no restriction whatsoever for any producer to produce a commodity and sell it in the Market. Restrictions may be in the form of Government’s license or permit, non-availability of technology, inadequate finance etc., Similiarly a producer is free to wind up his business without any problems, legal or political.. Such freedom avoids excess supply or shortages.
4)Complete Market information: A perfect knowledge or complete information about the market- price, demand, supply etc., is expected to be possessed by all the buyers and sellers. Such knowledge will prevent the buyers from paying a higher price and sellers charging a different price than what is prevailing in the Market.
5)Perfect Mobility of Factors of Production: Factors of production assumed to be freely mobile geographically and occupationally. It mainly applies to labor and capital. Perfect mobility helps diverting the factors to those areas where there is more demand from the one where the demand is deficient. It helps adjust supply according to demand.
6)No Transport Cost: Factors of production and goods are transported from the place of production to the Market without any cost. Transport cost does not arise if we take small geographical areas where production and sale takes place within that area . Agricultural products can be sold in the same village or town without incurring much transport cost. This condition is assumed to avoid any possibility of charging a higher price on the pretext of transport costs.