Question

Please explain all in microsoft word

Using real world examples, discuss the necessary conditions that must exist in order for a market to be perfectly competitive.

Answer 1

The following are the necessary conditions for a market to be perfectly competitive.

1. Large number of sellers: There should be large number of firms in the market selling the good.
2. Homegenous good: The firms should sell a similar/homogeneous product.
3. Price taking behaviour: The firms should be a price takers and not price makers. This means they have to accept the prevailing market price of the good in the market.
4. Free entry and exit: The firms should not have any barriers to entry or exit.

For example- In the market for goods like egg and corn, almost perfectly competitive behaviour can be observed. There are a large number of sellers in the market similar the homogenous good. (all eggs or corns are homogenous). The same price prevails in the entire market and firms are free to enter and exit the market.