Chapter 23, Problem 23.1LO

To determine

The characteristics of a perfectly competitive market structure.

Explanation of Solution

Perfectly competitive market is the market in which there are a large number of buyers and sellers. Each buyer and seller individually has no control over the market. The market forces determine the market price and the individual firms are price takers.

Following are the features of a perfectly competitive market.

a. Free entry and exit: In a perfectly competitive market, there is no restriction on firm’s market entry and exit. If the existing firms make profits, then new firms will enter the market. On the other hand, a firm can freely exit the market if it incurs losses.

b. Large number of buyers and sellers: In a perfectly competitive market, there are a large number of buyers and sellers. Each buyer and seller has no influence over market price of the good.

c. Homogeneous goods: The products produced and sold by a perfectly competitive firm are identical. This means that products of a perfectly competitive firm are perfect substitutes for each other.

d. Perfect knowledge: The buyers and sellers in a perfectly competitive market have perfect market information. This means buyers and sellers have complete information about the price prevailing in the market.

e. Perfect mobility of factors of production: In a perfectly competitive market, factors of production are completely mobile leading to factor-price equalization throughout the market.

Economics Concept Introduction

Introduction:

Perfectly competitive market is the market in which there are a large number of buyers and sellers. Each buyer and seller individually has no control over the market. The price in this market is determined by demand and supply forces in the market and the individual firms are price takers.