3.1.3 conditions of a perfectly competitive market

Question 1

explain consumer sovereignty

Answer 1

consumers of goods and services dictate how resources are used. Goods and services consumers choose to buy and reject determine resource allocation.
-this affects relative price and relative profits

Question 2

explain firms have no market power

Answer 2

As there are a large number of firms producing the same good with minuscule market share, producers have no market power and their actions are unable to influence prices.
-price takers

Question 3

explain firms have ease of entry, or exit or, no barriers

Answer 3

great ease of entry by new firms wishing to star up and ease of entry for firms willing to change the things they produce.

Question 4

explain products are homogenous

Answer 4

All products are identical and not differentiated by brand names, design differences or advertising.

Question 5

why does a perfectly competitive markets availability of homgeouns goods ensure low prices

Answer 5

-homogeneous products (identical goods) ensure that consumers have no preference for one producer over another.

-This leads to competition based solely on price, as firms cannot differentiate their products. As a result, firms are price takers, and the market sets the equilibrium price.

• This drives efficiency, as firms produce at the lowest possible cost to remain competitive.

Question 6

explain resources are mobile

Answer 6

mobile resources can be easily or quickly moved from one use to another.

when relative prices change in a market, resources will either be attracted to or repelled from , depending on what the change in price does to the level of relative profits. it is assumed that resources are mobile.

Question 7

explain behaviour is rational

Answer 7

owners of resources in a purely competitive market are assumed to engage in rational behaviour and want to maximise profits by minimising costs, producing what consumers desire, and selling these at highest possible price.

-consumers a utility maximisers

Question 8

explain perfect knowledge of the market

Answer 8

it is assumed that buyers and sellers make rationale decisions. to make rational decisions they must have full knowledge of the market. enabling them to make informed decisions about how resources should be used.