Th3.4: Characteristics of Perfect Competition

Question 1

For a good to be perfectly competitive, there must be four key characteristics. these mean that…

Answer 1

demand for the firm’s good is perfectly elastic and prices are solely determined by interaction of demand and supply - the firms are price takers

Question 2

What are the four characteristics of perfect competition?

Answer 2

many buyers and sellers
freedom of entry and exit from the industry
perfect knowledge
homogenous

Question 3

Many buyers and sellers

Answer 3

this means that no one firm or customer will be able to influence the market - if a firm did manage to have an effect, the market would no longer be perfectly competitive as there would be one large firm and other smaller ones

Question 4

Freedom of entry and exit from the industry

Answer 4

means that when a business is making profits anyone can enter that market and start producing that product for themselves - businesses then can’t make huge profits in the long run and make losses if they leave (normal profits in long run)

Question 5

Perfect knowledge

Answer 5

enables firms to know when other firms are making profits which will attract them to join the market - all firms have same costs as they can use same production technqiues

Question 6

Perfect knowledge part 2

Answer 6

also means any attempt to raise promises above level determined by market will lead to no sales, as customers know they can buy the same good for a lower price and firms won’t lower the price as they sell all their goods at the higher price determined by the market

Question 7

Homogenous

Answer 7

means if a firm raises its price above the competitors’ no one will buy it and they will not gain from lowering their price because they can sell all of the product at the same price as everyone else