3.4.2 Perfect Competition

Question 1

Name 4 characteristics of a perfectly competitive market

Answer 1

• Homogenous goods
• No / low barriers to entry
• Large number of buyers and sellers
• Perfect knowledge amongst consumers and producers

Question 2

Give two examples of markets that are competitive

Answer 2

• Foreign currency

- Commodities

Question 3

What other assumptions do we make about firms in competitive markets?

Answer 3

No externalities and no economies of scale

Question 4

Give two reasons to why perfect competition is thought to be the most desirable market structure

Answer 4

In a perfectly competitive market the consumer is sovereign so they have perfect choices and low prices.

Firms in perfect competition are efficient as they are competing against many other firms all selling identical products.

Question 5

Explain two reasons why the assumptions behind the model of perfect competition are unrealistic

Answer 5

This is because there is no such thing as perfect knowledge, economies of scale might exist to some extent and externalities will exist to some extent.

This will therefore be barriers to entry albeit they are small.

Question 6

In what circumstances might perfect competition not be desirable?

Answer 6

In markets where Research and Development are are important (technology) as the fact that only normal profits are made, there will be no money for investment, making dynamic efficiency impossible.