Question

First, identify a product market that can be considered competitive. Then, analyze the extent to which this market meets the five assumptions of the perfect competition model listed in the textbook (beginning with section 6.1 on p. 64).

Answer 1

Ex: Fruit and vegetable vendor market can be considered as competitive. Let us verify how far it satisfies the five assumptions of perfect competition:

1. Large number of buyers and seller

True - There are many people buying fruits and vegetables from the vendors - so there are many buyers. Also there are many sellers present in this market.

2. Homogeneous products

True - Each vendor sells the nearly same quality of products,

3. Perfect Information symmetry

True - Sellers and buyers have all relevant information to make rational decisions about the product being bought and sold. There is no hidden information.

4. Perfectly mobile factors of production

True to an extent - land, labour and capital can be switched in response to changing market conditions, prices and incentives. However there are some transportation costs.

5. Free entry and exit of sellers

True to an extent - many vendors can enter and leave the market without much restrictions/