3.4.2 Perfect competition

Question 1

Perfect competition

Answer 1

A market structure where there is a high degree of competition. In reality, the assumptions made rarely hold and no market is perfectly competitive.
-> Many small bakeries in a large city
-> Flower sellers at a wholesale market
-> Multiple bars in Spanish tourist resorts

Question 2

Characteristic of perfect competition: Homogenous product

Answer 2

Homogenous (identical) products (they are all perfect substitutes) - there is no product differentiation at all.
-So if a firm raises its prices above competitors no one will buy it, and if a firm lowers their prices they will not gain as they can sell their product at the same price as everyone else.

Question 3

Characteristic of perfect competition: Many buyers and sellers

Answer 3

There are many sellers, each of whom is too small to influence the market price through their individual actions.

Question 4

Characteristic of perfect competition: Freedom of entry and exit from the industry

Answer 4

-Free (costless) entry into and exist from the market i.e. no barriers to entry.
-This means that when a business is making profits anyone can