Question

Please explain the following: a) Explain using properly labelled diagrams, why a perfectly competitive firm will earn only normal profit in the long -run b) Explain SEVEN (7) conditions necessary for a perfectly competitive market to exist. please provide references

Answer 1

b) Explain SEVEN (7) conditions necessary for a perfectly competitive market to exist

(1) Large number of sellers and buyers: The first condition of perfect competition is that there is huge number of sellers and buyers

(2) Identical Products: Under perfect competition is that the products sold by the suppliers are fully identical

(3) Uniform price: Thirdly the ruling market price is the similar. Price is uniform as the products in the market are homogeneous

(4) Tree entry and free exit: Under perfect competition no restriction is imposed on their entry and exit are absolutely free to enter and exit in the market.

(5) Perfect knowledge about the market: One of the main pre-requisite of perfect competition is that both sellers and buyers should have perfect knowledge about the conditions of the market. Buyers must know the prices charged by different sellers; and sellers should know the ruling market price charged by other sellers from the buyers.

(6) Perfect mobility: The several factors of production are perfectly mobile within the industry under perfectly competitive market.

(7) Absence of transport cost: There is single unit price under perfectly competitive market. Price being charged by the firms is free of transportation cost.

Cite sources:

http://www.preservearticles.com/201106178089/7-most-essential-features-of-a-perfectly-competitive-market.html

https://open.lib.umn.edu/principleseconomics/chapter/9-3-perfect-competition-in-the-long-run/

http://www.economicsonline.co.uk/Business_economics/Perfect_competition.html