Chapter 9, Problem 10AA

To determine

To state: The conditions necessary for a perfect competition to exist.

Answer to Problem 10AA

Following are the conditions for a perfect competition:

1. Huge number of buyers and sellers,
2. Homogeneous products,
3. No entry or exit barriers,
4. Firms to be price takers, and
5. Having complete information of the market.

Explanation of Solution

The following is the list of the conditions that must be met for perfect competition to exist:

1. There exists huge number of buyers and sellers in the market.
2. Firms are trading in homogeneous products. The concept of product differentiation does not exist. All firms are producing identical products or services thereby resulting in no advertising costs too.
3. There are no boundaries on the entry and exit in the market which means that when the industry is earning profits, some new firms can enter the market lured by such profits without any hassles and at the same, if the industry is facing losses, the firms are permitted to easily leave the market.
4. Sellers and buyers have the perfect knowledge to make efficient decisions about which product is to be bought and sold
5. Every participant is a price taker i.e. they don’t have market power. If they try to raise prices of the products, they will end up losing customers.

Economics Concept Introduction

Introduction: Perfect competition refers to the market structure where there exists large number of buyers and sellers in trade of homogeneous products.