Question

Write your responses in complete sentences. Each answer should be two - three paragraphs (150 – 250 words) in length.

1. What are the four characteristics of perfect competition? Explain what would happen if they were absent from a market?

Answer 1

Characteristics of Perfect Competition.

Perfect competition is a market in which there are many firms selling identical products with no firm large enough relative to the entire market to be able to influence market price.

There are many features, such as :

• Large numbers of buyers and sellers
• Homogeneous products
• Perfect knowledge
• Free entry and exit
• Free form restriction or regulation
• Perfect mobility i.e. the factors of productions are free to move
• Lack of transport cost
• Lack of selling cost
• Same price

I am going to discuss any four of the features now.

1. Large number of buyers and sellers: The numbers of buyers and sellers should be in large number because there should be no individual person who would influence the output and price of the market. If this condition does not prevail then the perfect competitive market will change into monopoly market where the number of buyers and sellers will be restricted.
2. Homogenous product: Products of homogenous nature should be produced as there should be no preference of the buyers for any product and there will be uniform price of the product everywhere. If the product is not homogenous then it will become unique which becomes a characteristic of monopoly market.
3. Free entry and exit of firms: There should be freedom of the firms to enter and exit any time they want. In the market there will be profit and loss in the business so the firms should be free to enter whenever they want and exit whenever they want. If the buyers and sellers are restricted to enter and exit freely then the competition will become monopoly.
4. Perfect knowledge of the market: There should be perfect knowledge of the prices of the goods and the products which are to be bought and sold in the market. The knowledge of the goods of others which they prepare to sell and buy should also be known. If the knowledge becomes specialized which is not available to others then this feature becomes a feature of monopoly.