Question

In: Economics

2.   List and explain the main characteristics of a competitive market.

2.   List and explain the main characteristics of a competitive market.

Solutions

Expert Solution

Following are the main characteristics of a competitive market:

1) A large number of buyers and sellers: In a perfectly competitive market, there is a large number of buyers and sellers. Therefore, each seller controls a very small portion of the market. Also, the demand of an individual buyer is a very small portion of the entire market demand.

2) Buyers and sellers are price takers: Since there are a large number of buyers and sellers and each constitutes a very small portion of the total market demand or supply, all buyers and sellers are price takers. No buyer or seller has any market power.

3) Homogenous product: In perfect competition, there is no product differentiation i.e. all firms sell an identical good. In other words, there is no difference among the goods sold by different sellers.

4) No entry or exit barriers: In a perfect competition, there is no entry or exit barrier. Therefore, firms can easily enter or exit the market without any restriction.


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