Perfect Markets

Question 1

Explain Perfect competition?

Answer 1

• Perfect competition occurs in a market structure with a large number of participants who have access to all required information about the market place and are all price-takers.
• Prices are determined by demand and supply
• E.g: the stock exchange,
  the foreign exchange market,
  the central grain exchange,
  agricultural produce markets.

Question 2

What are the conditions of a perfect market?

Answer 2

• Free competition
• Large number of buyers and sellers
• All participants - perfect knowledge of market conditions
• No preferential treatment /discrimination
• Homogenous
• Efficient transport and communication
• Free access to and from markets
• Factors of production are completely mobile

Question 3

Explain Free competition.

Answer 3

• Buyers must be free to buy whatever they want from any firm and in any quantity.
• Sellers must be free to sell what, how much and where they wish.
• There should be no State interference and no price control.
• Buyers should not form groups to obtain lower prices, nor should sellers combine to enforce higher prices

Question 4

What is meant by No preferential treatment/discrimination?

Answer 4

• Collusion occurs when buyers and sellers make an agreement to limit competition - In a perfect market no collusion takes place.
• Buyers and sellers base their actions solely on price
• homogenous products fetch the same price and therefore no preference is shown for buying from or selling to any particular person

Question 5

Explain what is meant by Large number of buyers and sellers?

Answer 5

• It should not be possible for one buyer or seller to influence the price.
• When there are many sellers the share of each seller in the market is so small that the seller cannot influence the price.
• Sellers are price takers, they accept the prevailing market price. If they increase prices above the market price, they will lose customers.

Question 6

Explain what is meant by Products must be homogenous?

Answer 6

• Products must be identical. There should be no differences in style, design and quality.
• In this way products compete solely on the basis of price and can be purchased anywhere.

Question 7

Explain what is meant by All participants must have perfect knowledge of market conditions?

Answer 7

• All buyers and sellers must be fully aware of what is happening in any part of the market.
• Technology has increased competition as information is easily obtained via the internet.

Question 8

What is meant by No preferential treatment/discrimination?

Answer 8

• Buyers and sellers base their actions solely on price. (homogenous products fetch the same price and therefore no preference is shown for buying from or selling to any particular person.)

Question 9

What is meant by The factors of production are completely mobile?

Answer 9

• They can move freely between markets.

Question 10

What does Free access to and from markets mean?

Answer 10

• Producers may enter and leave a market with little interference.
• Entering and leaving a perfect market is easy as less capital is required and there are fewer legal restrictions.

Question 11

What is meant by Efficient transport and communication?

Answer 11

• Efficient transport ensures that products are made available everywhere.
• In this way changes in demand and supply in one part of the market will influence the price in the entire market.
• Efficient communication keeps buyers and sellers informed about market conditions.

Question 12

What are the competition tribunal’s main functions?

Answer 12

• grant exemptions, authorise or prohibit large mergers,
• adjudicate if any misconduct takes place,
• issue an order for costs on matters presented to it by the Competition Commission.

Question 13

Name the 4 market structures?

Answer 13

• Perfect competition
• Monopolistic competition
• Oligopoly
• Monopoly

Question 14

What is the the impact of entry and exit on the equilibrium of the firm and industry?

Answer 14

• Profits are a signal for the entry of new businesses.
• Losses are a signal for businesses to leave the market.
• The long-term equilibrium in the perfect market will be influenced by the entry or exit of businesses.

Question 15

Explain The supply curve of an individual firm.

Answer 15

• The short-run supply curve of an individual producer is part of the marginal cost curve that is above the minimum average variable cost.
• This starts from shut-down point upwards.

Question 16

What is The Competition Appeal Court?

Answer 16

• Its status is similar to the High court. It has jurisdiction throughout the Republic and is a court of record.
• Its main function is to review orders made by the Competition Tribunal and amend or confirm these orders.

Question 17

Describe Competition policies

Answer 17

• Competition refers to the existence of free entry into and exit from markets.
• This ensures that markets are not dominated by certain businesses.

Question 18

What are Goals of competition policy?

Answer 18

• To prevent monopolies or powerful businesses from abusing their power.
• To regulate the formation of mergers and acquisitions
• Stop the use of restrictive practices (like fixing prices, dividing markets etc.)

Question 19

The Competition Act in South Africa

Answer 19

To promote competition in order to:
* promote the efficiency of the economy (its primary aim)
* provide consumers with competitive prices and a variety of products
* promote employment
* encourage South Africa to participate in world markets and accept foreign competition in South Africa
* enable SMMEs to participate in the economy
* to allow the previously disadvantaged to increase their ownership of businesses

Question 20

Explain The Competition Commission?

Answer 20

It investigates restrictive business practices, abuse of dominant positions and mergers in order to achieve equity and efficiency in the South African economy.

Question 21

What is The Competition Tribunal?

Answer 21

• Has jurisdiction throughout the Republic.
• It is a tribunal of record
• Independent from the other competition institutions.