Question

1. Please discuss the characteristics of the perfect competition market structure.

2. What are the main characteristics of a competitive market?

3. Explain the difference between a firm’s revenue and its profit. Which do firms maximize?

Answer 1

Solution: The characteristics of a perfect competition market structure are:

1. Competitive markets consisting of a large number of firms: As the name suggests, a perfectly competitive market has a greater competition in between the firms and there are a large number of different firms present in the market. The products sold by these firms are identical or homogeneous.This is completely opposite to monopoly which has a solo ownership of the market
2. Firms are Price takers: In a monopoly market, the solo owners of products set the price of the product according to the demand of the consumers. On the other hand, in perfectly competitive market, each firm has it's share in the market structure and hence these firms don't set the price, they take the prices. Therefore firms are price takers in a perfectly competitive market structure.
3. No entry or exit barriers to firms: Unlike a monopolistic market structure, firms are free to enter and exit in a perfectly competitive market. No one can restrict the firms from entering the market.
4. Perfectly competitive markets: In the perfectly competitive market structure, there are independent firms and complete freedom of supply of any product. There is usually one price in a perfectly competitive market structure.
5. Perfect Information: Both the consumers and sellers have perfect and complete information about the product that they are selling or purchasing. This helps in determining the price which is uniform all over the market.

Solution 2: There is no such thing as a perfectly competitive market structure, hence what we have is a competitive market structure which posses the following characteristics:

1. In a competitive market there is a large number of firms that compete with each other. The increased competition helps in providing customers with the best and at reasonable prices.
2. There are no barriers to enter or exit in a competitive market structure. Any firm and every firm is free to enter and exit according to their choice.
3. Every product purchased or sold by the seller in a competitive market is identical or homogenous.
4. The prices are not set by the firms as they are not the sole owners of the market, they just have a share in the market structure.
5. There is no control of firms on the price. The prices change as the demand and supply of the product change.
6. The consumers and sellers have the complete knowledge about the product and the prices at which the product is being sold in the market.

Solution 3: A firm's revenue is determined by how much a firm earns by selling the product. The revenue is calculated as Price(P)*Quantity(Q) which shows that revenue is the money earned upon selling a particular good at a particular price.

A firm's profit is determined by the money which is left or earned after deducting the costs of production. The profit is calculated as Profit= Total Revenue - Total Costs.

The firms maximize the profits because that is the benefit earned by the firms on the products that they are selling.