Answer: Perfectly competitive market: It is a market situation
where there area large number of buyers and sellers. the sellers
sell the homogeneous product at a uniform price and enjoy the
freedom of enterprise. the price is determined not by the firm but
by the industry.
characteristics of a perfectly competitive market:
- A large number of buyers and sellers: implication of these
characteristics is that if any sellers withdraw from the market
total supply will not fall to such an extent as to raise its
price.
- Homogeneous product: it means the product of one seller is a
perfect substitute for another firm's product. if one tries to
raise the price of its output, it would lose al its sales.
- independent decision making: Buyer and seller are free from any
barriers or restrictions with regard to their buying and selling of
any product. there is no agreement between the buyer and seller in
respect of the production.
- freedom of entry and exit: Under perfect competition, any new
firm can enter any industry and any old firm can withdraw from
it.
- Perfect knowledge: Buyers and sellers have a perfect knowledge
of the relevant product price. the uniform price will prevail in
the market.
- Perfect mobility: all resources are perfectly mobile. it means
all resources must be able to enter and leave the market for eg
labor can move from one place to another.
- Absence of transport cost: Buyers and sellers incur no cost in
making exchanges in other words no transport cost. since it is
assumed that under perfect competition all firms share equal access
to the market.
Prediction of the model of perfect competition in predicting
markets in the real world work:
- There are many barriers with perfect competition for eg its one
of the characteristics is that all firms sell homogeneous products
now in real-world markets most products have some degree of
differentiation in terms of their size, purification, packaging,
etc.
- now another character that disturbs its relevance in real-world
marker is that it says freedom of entry and exit and we all know
firm face some barriers to entry in the real-world market in terms
of govt. regulations and startup costs.
- But in case of the agricultural industry, it is closely
exhibiting the features of perfectly competitive market, in which
producers have no ability to alter the price of their products.
they are free to enter and exit from the market.
- on the other way, the perfectly competitive market helps in
predicting positive economic outcomes for consumers and
businesses.
- although it is not highly predictable still in real world its
principles help one to understand the market situation.