In economics and general equilibrium theory, a perfect market is defined by several conditions, collectively called perfect competition . These conditions are:[citation needed]
A large number of buyers and sellers
Perfect information – All consumers and producers know all prices of products and utilities each person would get from owning each product.
Homogeneous products – The products are perfect substitutes for each other
No barriers to entry or exit
Every participant is a price taker – No participant with market power to set prices
Perfect factor mobility – In the long run factors of production are perfectly mobile, allowing free long term adjustments to changing market conditions.
Profit maximization of sellers – Firms sell where the most profit is generated, where marginal costs meet marginal revenue.
Rational buyers: Buyers make all trades that increase their economic utility and make no trades that do not increase their utility.
No externalities – Costs or benefits of an activity do not affect third parties. This criteria also excludes any government intervention.
Zero transaction costs – Buyers and sellers do not incur costs in making an exchange of goods in a perfectly competitive market.
Non-increasing returns to scale and no network effects – The lack of economies of scale or network effects ensures that there will always be a sufficient number of firms in the industry.
