Question

List the characteristics of a perfectly competitive market. Give an example. Why do firms in perfectly competitive markets have no control over the price of their products?

Answer 1

ANSWER 1) The following is the list of the characteristics of a Perfectly Competitive Market .

a. The products of the market must be homogeneous in nature . That means products produced and sell in the market by the firms must be homogeneous in nature . Therefore the technical characteristics and the services related with sell and delivery of the product are identical and due to this feature , no buyer could differentiate among the products of different firms and thus no firm has the discretion to set the price.

b. There must be a large number of buyers and sellers in the market so that each seller however large, supplies a small amount of the total quantity needed in the market .Again , due to numerous buyers ,no buyers have any monopsonistic power over the price of the market .

c. All the buyers and all the sellers must have the perfect knowledge about the market which includes all information regarding the prevailing conditions of the market both in present and future periods .

d. In the market there must be free entry and exit of all the firms .

e. Profit maximization goal . In perfectly competetive narket, the only goal of the firms is to maximize profit.

f. There is no Government intervention such as in the form of tariffs, subsidy etc present in the market

g. There present the perfect mobility of the factors of production ;that is the factors of production are free to move from one place to another throughout the economy. Therefore there exists perfect competition in the markets of the factors of production.

ANSWER :2 ) An example of perfectly competetive market.

Markets of agricultural goods can be said as an example. Suppose a market of same vegetable say potato or a same fruit say orange with large number of buyers and sellers is said to be an example of perfectly competetive market . Although , in the real world there doesnot exist an exact example for a perfectly competetive market and in that case , market of agricultural goods is not an exact but nearer exact example for the perfectly competetive market.

ANSWER :3 ) The firms in a Perfectly Competitive Marketkets have no control over the price of their products because here, in thistmarket asawe know that, the firms are producing and selling a homogeneous product ,so the technical characteristics and the services related with the sell and delivery of the product are identical in nature and due to this no buyer could differentiate among the products of different firms and therefore no firm has the choice to set the price . The price is therefore said to be given in the market . That is, each firm here is a price taker and as each firm is competing with the other firms with the homogeneous product they have ,they are forced to accept the prevailing price in the market in order to stay in the market .