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Explain each of the following characteristics of a perfectly competitive market - Leaving Cert Economics - Question b - 2018
Question b
Explain each of the following characteristics of a perfectly competitive market. (i) Perfect knowledge exists. (ii) All goods produced are homogenous goods. (iii)... show full transcript
Worked Solution & Example Answer:Explain each of the following characteristics of a perfectly competitive market - Leaving Cert Economics - Question b - 2018
Step 1
Perfect knowledge exists.
Answer
In a perfectly competitive market, perfect knowledge implies that all participants in the market (both buyers and sellers) have complete and accurate information about prices, products, and available technologies. Every firm is aware of the profits made by similar firms, allowing them to make informed decisions about pricing and production. Furthermore, consumers are equally well-informed about the prices being charged by different firms, which fosters competition and ensures that no single entity can unilaterally set high prices.
Step 2
All goods produced are homogenous goods.
Answer
Homogenous goods are products that are identical in quality and characteristics across all producers. In a perfectly competitive market, these goods are indistinguishable from one another, meaning that consumers view them as perfect substitutes. This uniformity eliminates the need for brand differentiation or advertising, as the focus shifts purely to price competition among sellers. Since the goods are identical, consumers will always purchase from the seller offering the lowest price.
Step 3
Free entry and exit exists in the industry.
Answer
The characteristic of free entry and exit refers to the lack of barriers for firms to join or leave the market. New firms can enter the market when they see a potential for profit, which increases competition, while existing firms can exit if they are unable to sustain profitability. This condition ensures that resources are allocated efficiently, as firms that are unable to compete will leave, while those that can provide better products or services at lower costs will thrive. Consequently, this fluid dynamic promotes a balanced market in the long run.