What defines a perfectly competitive market?

A perfectly competitive market is characterized primarily by the presence of numerous firms that sell identical or nearly identical products. This homogeneity of products ensures that consumers view them as substitutes for one another, which leads to a situation where no single firm has the power to influence the market price. Instead, prices are determined by the aggregate supply and demand in the market.

In this scenario, because there are many firms competing to sell the same product, each firm is a price taker. They must accept the market price that is set by the interplay of total supply from all firms and total demand from all consumers. This contrasts with markets dominated by one or a few firms, where price influences can be exerted.

Additionally, perfect competition entails other factors such as ease of entry and exit in the market, meaning that new firms can enter without significant barriers and existing firms can leave without incurring substantial costs. This leads to an efficient allocation of resources over time.

Hence, the defining characteristic is the presence of many firms selling identical products, which promotes competition and keeps prices low for consumers.