Question

Perfectly competitive market has many characteristics. Explain in details those characteristics. Discuss why most industries are not perfectly competitive.

Answer 1

Characteristics of perfect competitive markets

Many buyers and sellers: there are many buyers and sellers in this type of market and hence the share of each is them is small. No single buyer or seller is able to influence the prices or output in the market. Hence the sellers are price takers and not price makers in this market.

Homogeneous product: The good sold in this type of market is homogeneous in terms of quality, shape , price etc. Hence there is virtually no difference which means that the prices would be same for the good from all sellers.

Full information: The buyers and sellers have complete information about the market. This means that none of the market has asymmetric information which could be used at the expense of another market.

Easy entry and exit: Since there are a large number of buyers and sellers, the entry and exit of one of sellers would not influence the output. Also the entry of a new seller would not influence the market.

Zero profits in short run: The profits in perfectly competitive market are zero. No seller could lower the price as this could lead to losses and no seller could increase the price as this would mean that the buyer could buy from another seller.

Perfectly competitive market is not usually seen in real terms. This is mainly because the products sold are not always identical in all terms . There is difference in terms of quality etc in real life. Also there is no complete information that buyers have about the good. Usually sellers have more information about the product than sellers .

Perfectly competitive market might not exist in real terms but serves are as a basis to understand other markets.