Question

Describe the characteristics of a firm exhibiting pure competition in the product market. Give enough information to explain how each characteristic is important to the model.

Please show me your thought process. Please explain it as if you are telling it to someone who has no clue about economics.

Answer 1

Pure competition have the following characteristics:

1. There are large no. of buyers and sellers.
2. Firms in pure competition deals in homogenous products.
3. There is free entry and exit of both buyers and sellers.

Each characteristic of pure competition has its own importance as follows:

• There are large number small buyers and sellers which means there is a lot of competition between in them which doesn't allow them to charge higher and higher price for a particular product as the case is in monopoly which has a single seller who can take whatever price he wants to
• This makes firms in pure competition price taker instead of price maker.
• Due to homogenous(similar) products buyer can compare the prices between different firms and buy at the best price (normally due to homogenous products same price is charged by all the firms)
• Free entry and exit allows firms to enter and exit anytime. If they feel like they are incurring losses due to excessive competition they can exit and if they see more profit opportunities in the pure competition market they can enter the market and exploit the profit opportunities.