Question

There is no perfect example for perfectly competitive markets. However, we can find a few approximations.

1. Please first review the main characteristics of perfectly competitive markets.
2. Then give an example for a perfectly competitive firm. Explain how this firm meets each characteristic in these markets.

Answer 1

Perfectly competitive market:-

In a perfectly competitive market, there many buyers and sellers available and all of them are price takers. Also, this market would have undifferentiated market with no barriers. The entry of buyers and sellers have no restrictions and does the exit.

The total revenue a firm generated in a perfectly competitive market is characterized as,

Total Revenue = P*Q

Where, P = price

And. Q = quantity

- all the firms have to set their product on a normative price as market prices are in equilibrium (pressure of competing forces)

- in this market all the buyers and sellers have all the information available for them to make a rational decision based on it.

An example of perfectly competitive market is,

Agricultural products.

Many farmers producing somewhat identical products like grains, vegetables and fruits coming in the market where there are many buyers and sellers available.

The prices are set based upon the competitive environment and a availability of options.

Hence there are equilibrium in prices as well because of the competition and the more number of buyers and sellers.

There are no barriers for buyers as well as sellers.

Overall, it is easy to enter in agriculture as buying land and farming it and exiting it is also easier hence minimal barrier and restrictions.