- 6 Marks
Question
A perfectly competitive market has been described as one in which buyers and sellers have no option but to take the price determined by the forces in the market. Whereas prices are determined by the forces in a perfectly competitive market, a monopolist firm can maximise its revenue by doing one of two things – choose price or quantity.
Required: i) Explain THREE (3) characteristics of a perfectly competitive market. (3 marks) ii) Explain the statement in bold. (3 marks)
Answer
i) Characteristics of Perfectly Competitive Market
- The market is composed of a large number of buyers and sellers, none of whom can dominate the market.
- All the buyers and sellers who operate in the market have perfect information about factors affecting price and they all behave rationally.
- A perfect market is for undifferentiated and homogenous product so that buyers are indifferent as to who they buy it from.
- There are no barriers to firms which desire to enter or leave the market. Entry into and exit from the market are free.
(Any 3 points @ 1 marks each = 3 marks)
ii) Options Available to Monopolist: Choose Price or Quantity In its attempt to maximize profits, the monopolist firm can choose to set the price at which it is willing to sell the product in which case buyers decide how many units they can buy at that price level.
The firm may also decide to set the quantity of products it wants to sell and be prepared to accept the price at which the buyers are willing to buy the product.
(3 marks)
- Tags: Economic theory, Market structure, Monopoly, Perfect competition, Price determination
- Level: Level 1
- Topic: Competitive forces and markets
- Series: MAR 2024
- Uploader: Theophilus