Question

One of the assumptions of a perfectly competitive market is that firms within the industry are selling homogenous, or identical, products. Can you think of an example of an industry (not given directly in the chapter) where this is a good assumption? How does this impact competition within this industry?

Answer 1

Internet service providers are an example of perfect competition where they all provide the same service to the customers (internet) hence fulfilling the characteristic of homogenous goods. Another example can be of the agricultural markets where all farmers sell homogenous goods(vegetable or fruit). The local fish market is also an example of perfect competition. Internet service providers and local vendors are all price takers due to the competition as if they increase their price they will lose their customers hence revenue, this induces them to take the equilibrium price as price equal to marginal cost determines the output level in perfect competition. Therefore the demand curve in perfect competition is horizontal.