Question

Define the characteristics of a perfectly competitive market with an example for each. Discuss how the characteristics fit into the examples you provide. Each example needs to come from a peer-reviewed (scholarly) source. Finally, how does consumer and producer surplus help give a perfectly competitive market an advantage? Please be specific.

Answer 1

The characteristics of perfectly competitive market are:

1. Large number of firms.
2. Homogenous product
3. Firms are price taker.
4. No barriers to entry.

Example of perfectly competitive markets are foreign exchange market where the price is fixed no one can exchange the currency at rates other than the exchange rate prevailing in the market. The currencies being exchanged are same at each exchanging counters.

Under the perfectly competitive market structure the firm have horizontal demand curve. Therefore the firms sell at a price equal to the marginal cost. This maximizes consumer as well as total surplus. In other market structure the producers produce at a level where MR = MC. The quantity produced is less than the perfect competition therefore the total surplus is not maximized.