Question

Every Sunday, Mandy sells her homemade candies, Mandy’s Candies, at a large local farmers’ market. At the last market, there were many other stalls selling exactly the same candies as Mandy's. The market displayed all the characteristics of a perfectly competitive market.

1. The demand for Mandy's candies is not perfectly elastic.

2. Mandy will be a price taker.

3. For a perfectly competitive market, there would be easy entry and exit.

Which of the above statements are true:

  

Only 1 is true.

  

Only 2 is true.

  

Both 1 and 2 are true.

  

Both 2 and 3 are true.

  

All three are true.

Answer 1

A perfectly competitive market is the one in which no individual seller is large enough to have any control over the price of the market. All the products in this market are homogenous which means that the products are identical in size, shape colour, weight and price is determined by the forces of market supply and market demand.

1. The first statement is false. In a perfectly competitive market, since each firm is selling a homogenous products, the products are perfect substitutes of each other as there is zero product differentiation. A firm can sell any quantity at the prevailing price which means that the demand curve under perfect competition is perfectly elastic and a slightest increase in the price would mean that the demand is zero since the buyers have an option to shift to the other sellers who are selling the same product at the prevailing market price and not a higher price. So, this statement is false that her demand curve is not perfectly elastic. It is perfectly elastic.

2. This statement is true that Mandy will be a price taker. Since the product is homogenous, a firm has no control over the price. Even a slightest increase in the price by one firm will shift its buyers to the other firm producing the same commodity. Price is determined by the forces of market supply and market demand. A firm sells its output at the given price. Therefore, a firm under perfect competition is a price take and not a price maker.

3. This statement is true that for a perfectly competitive market, there would be easy entry and exit. A new firm is free to enter the industry and an existing firm is free to leave the industry. Entry and exit of firms is though possible only in the long period because short period is too short for an existing firm to leave the industry as well as too short for a new firm to join the industry whereas long period is long enough for a firm to exit or for a new firm to join the industry. But, there is an easy entry or exit or there is freedom of entry and exit.

So, both 2 and 3 statements are true.