Question

Describe characteristics and give examples of perfect competition

Answer 1

A perfectly competitive market is characterized by numerous sellers and buyers, homogeneous products, easy entry and exit for firms, and the fact that firms are price takers. In the short run, firms can make a profit or a loss, but in the long run, the market achieves equilibrium, and firms earn only normal profits. An example includes the agricultural industry for products like wheat.

Step-by-step explanation:

In a perfectly competitive market, several key characteristics are present. Firstly, the market has many sellers and buyers, making it impossible for single entities to manipulate market prices. Secondly, easy entry and exit of firms in the market ensure that no individual sellers can control the market. Thirdly, all sellers offer identical products, which means that consumers do not prefer one seller's product over another's based on quality or features. Lastly, sellers in a perfectly competitive market are price takers, which means they accept the market price as given and cannot set their own prices.

In the short run, perfectly competitive firms may experience profits or losses due to fixed factors of production and existing market prices. However, over time, as firms enter or exit the market in response to these profits or losses, the market reaches an equilibrium where firms only manage to earn normal profits in the long run. This ensures that the supply in the market adjusts to the level where the price equals the average cost, eliminating any economic profits.

Consider the agricultural industry where many farmers sell identical products such as wheat. The products are homogeneous, there are numerous buyers and sellers, and farmers have little control over the market price of their wheat; they are price takers. This industry checks the criteria for a perfectly competitive market.

Answer 2

Perfect competition is the simplest market structure, where the market is assumed to be in equilibrium and that all sellers sell the same product at the same price. The four conditions for perfect competition are:

1. There are many buyers and sellers in the market so that no one individual or seller can influence the price of the products, goods, and services.
2. Identical products are offered by the sellers
3. Both the buyers and the sellers are well-informed about the products and want to maximize profit.
4. Entry and exit to and from the market can be done freely by the sellers and buyers.

There is no market which displays 100% perfect competition. However, markets exhibiting nearly perfect competition do exist. These include street food vending and agricultural markets.