6.1 PERFECT COMPETITION (PERFECT MARKETS)

Question 1

Describe the term: Perfect competition

Answer 1

• Perfect competition occurs when none of the individual market participants can
influence the price of the product

Question 2

Examples of markets in perfect competition

Answer 2

• Stock exchange
• Foreign currency market
• Central grain exchange market
• Market for agricultural produce

Question 3

Markets are impersonal

Answer 3

• Businesses strive towards maximum profit and only take its own cost structure into account, when determining the production levels.
• All are price takers.

Question 4

CHARACTERISTICS OF PERFECT COMPETITION

Many buyers and sellers:

Answer 4

Many buyers and sellers:
• The number of buyers and sellers in the market is so large that individual market participants are insignificant in relation to the market as a whole.
• The number of buyers and sellers in the market is so large that the individual buyer or seller cannot influence the market price (price takers).

Question 5

CHARACTERISTICS OF PERFECT COMPETITION

Homogenous product:

Answer 5

• All the products sold in the specific market are homogenous, that is, they are exactly the same regarding quality, appearance, etc.
• It makes no difference to a buyer where or from whom he/she buys the product.

Question 6

CHARACTERISTICS OF PERFECT COMPETITION

Freedom of entry / exit:

Answer 6

• There is complete freedom of entry and exit, that is to say the market is fully accessible.
• Buyers and sellers are completely free to enter or to leave the market.

Question 7

CHARACTERISTICS OF PERFECT COMPETITION

Mobility of factors of production:

Answer 7

• All factors of production are completely mobile, in other words labour, capital and all other factors of production can move freely from one market to another.

Question 8

CHARACTERISTICS OF PERFECT COMPETITION

Perfect information:

Answer 8

• Both buyers and sellers have full knowledge of all the prevailing market conditions.
• For example if one business ventured to raise its price above the market price, buyers would immediately become aware of it and would switch their purchases to businesses who still charge the lower price.

Question 9

CHARACTERISTICS OF PERFECT COMPETITION

No collusion:

Answer 9

• Collusion between sellers does not occur.
• In a perfectly competitive market, each buyer and seller acts independently from
one another.
• Collusive practices are illegal in South Africa, according to the Competition Act
1998.

Question 10

CHARACTERISTICS OF PERFECT COMPETITION

Unregulated market:

Answer 10

• There is no government intervention that could affect buyers or sellers.
• Decisions are left to individual sellers or producers and buyers.

Question 11

CHARACTERISTICS OF PERFECT COMPETITION

No preferential treatment (no discrimination):

Answer 11

• Nobody is advantaged above the others.

Question 12

CHARACTERISTICS OF A PERFECT COMPETITION

Efficient transport and communication:

Answer 12

• Makes access to and from markets possible.