Question

1. What are the important characteristics of perfectly competitive markets?

2. Give me 5 examples of perfectly competitive markets.

3. Why do you think economist really like to talk about competitive markets?

4. What does the concept of low or no barriers to entry mean? Why is it so important to understand barriers to entry?

5. Give me 5 examples of price takers in perfectly competitive markets.

Answer 1

The main characteristics of perfectly competitive markets are:

1. A Large Number of Buyers and Sellers

2. An Identical or a Homogeneous Product

3. No Individual Control Over the Market Supply and Price

4. No Buyers’ Preferences

5. Perfect Knowledge

6. Perfect Mobility of Factors

7. Free Entry and Free Exit of Firms

Examples of perfectly competitive markets are :

i) Agricultural Markets (ii) Free Software (iii) Street Food Vendors (iv) Unskilled Labour (iv) Semiconductors

In a competitive market, each player strives do to his best and optimize his production of useful goods. By doing so, the overall wealth of the entire community of players is increased. It also weeds out the marginal players who lose.

But in a true perfect competition, which hardly ever exists, there are no real winners. Any single person's advantage is quickly competed away by others, who are themselves competed away, and so on. It would theoretically become a perfect stalemate of everyone working hard and producing much, yet nobody becoming rich or poor.

Barriers to entry are factors that prevent or make it difficult for new firms to enter a market. The existence of barriers to entry make the market less contestable and less competitive. The greater the barriers to entry which exist, the less competitive the market will be. Barriers to entry are an essential aspect of monopoly markets. Barriers to entry benefit existing firms because they protect their revenues and profits. It may be caused naturally, by government intervention, or through pressure from existing firms.

A price-taker indicates a firm that produces a homogenous product of which there are many substitute goods in the industry and cannot charge a price higher than the market price.

Examples of price takers are :

i) Agricultural Markets (ii) Free Software (iii) Street Food Vendors (iv) Unskilled Labour (iv) Semiconductors