The perfect market works when the forces of supply and demand operate freely, with the conditions of competition fully given. Thus, bidders and demanders are characterized by being price-acceptors..
In other words, a perfect market is one where there are many buyers and sellers. This will allow no competitor to have the power to set the market price.
The perfect market, moreover, can only work when all those who buy and sell have complete information about the supply, demand and conditions how the market moves.
Likewise, the goods that are sold in a perfect market, even if they are offered by different sellers, must be the same or identical. At the same time, there must be freedom so that any bidder or demander can enter the market without any difficulty.
These conditions of perfect competition can only exist under theoretical conditions, but they never occur in reality. Therefore, a perfect market condition does not exist.
What requirements are needed for the perfect market to function?
The main requirements for the functioning of the perfect market are:
1. Free competition
First, free competition is necessary for the perfect market to function. This implies that there must be a huge number of buyers and sellers and any of them have the capacity to compete.
Additionally, this allows none of the market participants to set the price. That is, they have to accept what the market establishes, since no competitor has any advantage over the others.
2. Homogeneous or equal products
Second, the products offered in this type of market have to be the same. Therefore, even though there are many sellers offering the products, the products are the same for the buyer. This implies that buyers show indifferent behavior to the choice of one product or another, causing no preference for any seller to be manifested.
Third, only the free operation of supply and demand is required to determine price formation. Indeed, in this market the price could only change due to changes in supply and demand.
Naturally, for this it is necessary that there is no barrier established by the Government or by any company that has an advantage over the others. Thus, as no competitor has an advantage over the others, anyone can freely enter and exit the market.
4. Access to perfect information
Finally, the information must be available and free of charge to all market participants. All competitors are aware of all the demands and offers on the market, as well as the price and quality conditions of the products sold in the market. This allows there to be no uncertainty when making decisions in the market.
How is the equilibrium price formed in the perfect market?
Of course, when the market is perfect, the price is set at the point where the supply and demand curve intersects. At this point of equilibrium, the quantity demanded and supplied will also coincide, without there being any surplus or shortage in the market.
However, this does not mean that the balance cannot be changed. The important thing is that the balance only changes from one point to another, but it is not lost. If demand increases or supply decreases, the equilibrium price increases. Whereas, if demand decreases or supply increases, the equilibrium price decreases.
To conclude, we can determine that the perfect market only works in a theoretical way, but never occurs in reality, since it is unlikely that the conditions of perfect competition will exist. In reality, perfect information is not handled and there are no homogeneous products. Furthermore, in most markets there are not a large number of buyers and sellers and barriers are common. These barriers can be established by the Government or by a competitor who has a superior advantage over the others.