(a) What is a perfectly competitive market? (b) Explain the conditions necessary for a perfectly...
(a) What is a perfectly competitive market?
(b) Explain the conditions necessary for a perfectly competitive market,
Explanation
(a) A perfectly competitive market is a market in which the forces of demand and supply operate unimpeded.
(b) The conditions necessary for a perfectly competitive market are:
(i) Buyers and sellers must be price takers. A price taker is a firm or individual who takes the market price as given.
(ii) The number of firms must be sufficiently large so that any firm's output, compared to the market output, is marginal
(iii) There must be free entry and free exit. There should be no barriers like technological or efficient scale operation which allows only one firm to produce at the lowest average total cost.
(iv) There must be homogenous product i.e the goods sold must be perfect substitutes.
(v) There must be no preferential treatment to either buyers or sellers in the market.
(vi) Complete information on the market conditions must be made available to all the operators in the market.
(vii) All the firms must have opportunity to maximize profit.
(viii) Goods must be portable i.e there should be no transport cost 1 incurred by the firms.