Question

Which of the following best approximates a perfectly competitive market structure?

a. automobile manufacturing

b. the insurance market

c. the airlines industry

d.stereo equipment

e.foreign exchange markets

Answer 1

Answer

a) automobile manufacturing

A perfectly competitive market is a market in which the following features exist.

1. Many sellers, and many buyers in the market.

2. All the firms produce homogeneous, identical goods.

3. Firms are price taker, and thus can not influence the market with price and quantity.

4. There is no barrier to entry in and exit from the market.

5. All the firms face a perfectly elastic horizontal demand curve at the given market price.

6. As there are many firms, so their market share is relatively small.

7. The consumers are fully aware of the market.

8. Like the goods, the inputs are also homogeneous.

9. No government control over the market.

In fact, in real world, pure perfect competition almost doesn't exist, especially in the secondary, and tertiary sector. In the example ,among the five markets, the automobile manufacturing can be said best approximates a perfectly competitive market structure. the reasons are as follows:

1. There are many automobile manufacturers in an economy, and in the world.

2.There is no barrier of the automobile manufacturers to enter the market and exit from the market.

3.None of the firms can influence the market.

4. The consumers are fully aware of the market of automobiles.

5. Almost all the inputs are homogeneous by nature and produce the same thing.

6. There are many automobile manufacturers in the market and so their market share is also divided among many consumers.

7. All the firms face a perfectly elastic horizontal demand curve and at a particular price level, it can sell as much as it wish and can make its profit maximum.

8. There is no government control in the market,.So firms can sell according to the market demand.

All the other industries in the example, are either oligopoly or not best approximate the perfectly competitive market structure.

_________________________________________________________