LS8

Question 1

Assumptions of perfect competition

Answer 1

• Firms aim to maximise profits
• There are many participants (both buyers and sellers)
• The product is homogeneous
• No barriers to entry or exit
• There is knowledge of market conditions
• There are no externalities

Question 2

Many participants

Answer 2

• There are so many buyers and sellers that no individual trader is able to influence the market price
• Market price is determined by the operation of the market

Question 3

Perfect knowledge

Answer 3

• Buyers always know the prices that firms are charging, and thus can buy the good at the cheapest possible price
• Firms that charge above the market price will get no takers
• Traders are aware of the product quality