Question

Watch the VIDEO, read the assigned material and answer the following questions: • Please provide an example of a perfect competitive market • Please list all the four characteristics of a perfect competition and elaborate how they are fulfilled in your example. NOTE: This example is asking for a market (e.g., market for iphones, oranges, milk, etc.). Please do not provide examples such as Amazon, Ebay, Internet, which provide the institution and infrastructure to emerge markets.

Answer 1

Perfect Competition is a form of market in which there are large number of buyers and sellers selling homogeneous product. The price of the commodity is determined by the market forces of demand and supply. No individual firm or individual buyer can influence this price as they have a very negligible share in the whole market.

Let us understand the form of market with the help vegetable market.

1. Large number of buyers and sellers: In the vegetable market there are large number of buyers and sellers. The price of the vegetables is determined by the market forces of demand and supply. An individual seller or buyer cannot influence this market determined price by changing their supply or demand respectively. This is because there contribution to the overall market is very negligible. That is they are known as price taker.

2. Perfect knowledge: the buyers or sellers in the homogeneous market has perfect knowledge. Sellers have the perfect knowledge about the price and output policy of others seller. Buyers too have the perfect knowledge about the prices. Any attempt by any seller of charging higher price or lower price will fail.

3. Free entry and exit:: In vegetables market there are no restriction to entry and exit. This market is free from barriers. When there is profit in this market, new sellers may enter and when there are losses they may exit from the market.

4. No advertisement cost: In vegetables market, buyers and sellers have perfect knowledge. That is why sellers in this market do not incur expenditure on advertisement or any selling cost. Expenditure on selling will raise the price and price is already fixed by the market. That is why sellers donot incur expenditure in selling.