Question 1: What are the characteristics of a perfectly competitive market?
Answer:
This type of market structure refers to the market that consists of a larger number of buyers and also a large number of sellers. No buyers and also a large number of sellers. No individual seller is able to influence the price of an existing product in the market. All sellers in a perfect competition produce homogenous outputs i.e. the outputs of all the sellers are similar to each other and the products are uniformly priced.
Features of perfectly competitive market
The main features of perfectly competitive market are:
1. A larger number of buyers and sellers
There exist a larger number of buyers and sellers in a perfectly competitive market. The number of sellers is so large that no individual firm owns the control over the market
price of a commodity. Due to the large number of sellers in the market there exists a perfect and free competition. A firm acts as a price taker while the price is determined
by the invisible hands of market i.e. by demand for and supply of goods. Thus we can conclude that under perfectly competitive market an individual firm is a price taker and
not a price maker.
2. Homogenous products
All the firms in a perfectly competitive market produce homogeneous products. This implies that the output of each firm is perfect substitute to others output in terms of
quantity quality colour size features etc. this indicates that the buyers are indifferent to the output of different firms. Due to the homogeneous nature of products existence of
uniform price is guaranteed.
3. Free exit and entry of firms
In the Long run these is free entry and exit of firms. However in the short run some fixed factors obstruct the free entry and exit of firms. This ensures that all the firms in
the long-run earn normal profit or zero economic profit that measures the opportunity cost of the firms either to continue production or to shut down. If there are abnormal
profits new firms will enter the market and if there are abnormal losses a few existing firms will exit the market.
4. Perfect knowledge among buyers and sellers
Both buyers and sellers are fully aware of the market conditions such as price of a product at different places. The sellers are also aware of the prices at which the buyers
are willing to buy the product. The implication of this feature is that if any individual firm is charging higher or lower price for a homogeneous product the buyers will shift their purchase to other firms or shift their purchase from the firm to other firms selling at lower price.
5. No transport costs
This features means that all the firms have equal access to the market. The goods are produced and sold locally. Therefore there is no cost of transporting the product from
one part of the market to other.
6. Perfect mobility of factors of production
There exists geographically and occupationally perfect mobility of factors of production. This implies that the factors of production can move from one place to other and can
move from one job to another.
7. No promotional and selling costs
There are no advertisements and promotional costs incurred by the firms. The selling costs under perfectly competitive market are zero.
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