Question

Some businesses need a lot of fixed cost, but the variable cost required will be very small. On the other hand, some other businesses need only small fixed cost, but have high variable cost. In which situation there is a higher chance of perfect competition? Why?

Answer 1

The perfect competition is characterized by the lack of entry barriers.

This means that any firm can enter the perfectly competitive market.

If an industry is such that setting up of business in such a industry requires significant fixed cost but variable cost is very small the such upfront cost (significant fixed cost) can deter many firms to enter the industry and thus this high fixed cost could act as entry barrier into the industry. This will act as barrier for industry to develop in to perfect competition.

On the other hand, if an industry is such that businesses need only small fixed cost vut high variable cost then entry into the industry is easy and new firms can enter the market with ease as there is very small upfront cost. This can lead to industry being developed into perfect competition.

Thus,

The situation where businesses need only small fixed cost, but have high variable cost has higher chance of developing into perfect competition.