Question

Explain assumptions of perfect competitive market based on following a,b,c. Reasons, why are these important?

a) Homogenous goods

b) Many consumers (buyers) and sellers who are small in comparison to the market as a whole. Individuals cannot influence market’s supply or demand.

c) Many potential sellers

Answer 1

a) homogeneous goods are important in the perfect market condition because the firms have no control over the price of the goods, if the goods are not similar then it will give the firms some control over the price and that will make the demand curve for a firm downward sloping. and that will differ the equilibrium point and a firm will become monopolistic competitive rathr than a perfect market firm.

b) If the firms can influence the market then that will become a monopolistic competition and the firms will become a price finder instead of a price taker. For the perfect market condition market to be in the equilibrium and allocative efficient the firms should have no control over the price, same with the buyers.

c) It is important to maintain the competition in the market. Or it will start behaving like a monopoly that is not allocative or productive efficient.