What are the characteristics of a perfectly competitive market?

Expert Solution

A perfectly competitive market is characterized by following:

(1) There are many buyers and many sellers in the market.

(2) Each seller (firm) is identical in cost structures, and sells identical goods.

(3) An individual firm is too small to influence market price, so it accepts the price determined by free market forces of demand and supply as its own price. Therefore, firm's demand curve is horizontal and perfectly elastic.

(4) Each firm maximizes profit by equating price with its marginal cost.

(5) There are no entry or exit barriers.

(6) Because entry and exit are free, a short run economic profit attracts entry, and new firms enter until each firm earns zero economic profit in long run. Similarly, a short run economic loss causes some firms to exit the market, until each firm earns zero economic loss in long run. So long run economic profit for individual firms is zero.

(7) There are no costs of transactions and information is free.

Rahul Sunny answered 2 years ago

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