Theory question 106
Market StructuresSection B (answer four questions only from this section)
(a) What is a perfectly competitive market?
(b) Explain the conditions necessary for a perfectly competitive market.
Show the model answer
(a) A perfectly competitive market is a market with very many buyers and sellers of an identical product, in which no one buyer or seller can influence the price; price is set by market demand and supply.
(b) Large number of buyers and sellers, each too small to affect price (price takers).
Homogeneous (identical) products.
Free entry into and exit from the industry.
Perfect knowledge of market conditions by buyers and sellers.
Perfect mobility of factors of production.
No government interference and no preferential treatment of buyers or sellers.
No transport costs (or negligible).
Firms aim to maximise profit.
Explain each condition briefly.