Perfectly Competitive Market Flashcards, test questions and answers

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What is Perfectly Competitive Market?

A perfectly competitive market is a market structure where there are many buyers and sellers, each selling an identical product or service. The buyers and sellers have access to all relevant information about the price of the goods and services being sold, and all firms have freedom to enter or leave the market as they wish. Prices are determined by the interaction between supply and demand in the marketplace, with no single firm having any significant influence on price.The main features of a perfectly competitive market include: homogenous products, free entry/exit of firms into/from the industry, perfect information available to buyers and sellers, no barriers to entry/exit due to government intervention or natural monopoly power. In addition, firms in this type of market face perfect competition meaning there is an incredibly large number of competitors who can provide identical products at similar prices. Therefore, these firms can only make economic profits if they are able to successfully differentiate their products from those offered by other companies in order to attract customers away from competitors. Due to its unique characteristics (ease of entry for new competitors) and its efficiency (market forces determine prices), a perfectly competitive market is often used as a benchmark for comparison when examining other types of markets such as oligopoly or monopolistic competition. This is because it serves as an ideal example which captures most aspects that characterize real-world markets including their dynamic nature where profits can be made but also lost quickly if strategies aren’t well thought out. In conclusion, a perfectly competitive market is one where there are many buyers and sellers who offer an identical product or service; prices are determined by supply & demand; barriers such as government intervention or natural monopoly power do not exist; perfect knowledge exists amongst participants; free entry & exit applies; homogenous output occurs; and profits can be earned but also quickly lost due to intense competition with few opportunities for differentiation among goods & services offered.