Chapter 9, Problem 1QFR

To determine

The necessary conditions for perfect completion market to exist

Explanation of Solution

In perfect competition market, neither a single producer nor a single consumer can determine the operation of this market. It offers efficiency in both allocation and production. The necessary conditions for this market to exist are:

• A large number of buyers and sellers:

  There are so many customers that one customer can purchase a very small portion of the market supply; likewise a single seller can provide a very small fraction of the total output too. Hence in relation to the sector it belongs, the size of the competitive firm is very small.

• Homogenous products:

  All suppliers provide a homogenous product in a perfect competition market, in simple words all the competitive firm's products are the same.

• Perfect information:

  Buyers, as well as sellers, have complete knowledge of the current market price. That is why in a perfect competition market there can only be one price.

• No barriers to entry or exist:

  A new business can freely enter into this particular type of market or an existing business can freely leave the industry in the longer term.

• Cheap and efficient transportation:

  Another feature of competitive market is low priced and efficient transport. Firms do not incur substantial costs in transporting goods in this type of market. This reduces the cost of the product and lessens the delays in the transportation of goods.

Economics Concept Introduction

Introduction:

A perfect competition market is one where a huge number of sellers compete with each other to fulfill the demands and requirements of a huge number of consumers. The brief idea of perfect competition market is given in the following diagram:

  

  Figure - A