All of the following are characteristics of perfect competition except
A. both buyers and sellers have access to all relevant information.
B. firms can enter or leave the industry without serious impediments.
C. there are a large number of buyers and sellers.
D. the products sold by the firms in the industry are differentiated.
The Correct Answer and Explanation is :
The correct answer is: D. the products sold by the firms in the industry are differentiated.
In a perfectly competitive market, several key characteristics define the structure and behavior of participants:
- Information Accessibility (Option A): Both buyers and sellers in a perfectly competitive market have access to all relevant information about prices, products, and market conditions. This transparency ensures that no party has an advantage over others through information asymmetry, enabling prices to reflect the true supply and demand dynamics.
- Free Entry and Exit (Option B): There are no significant barriers to entry or exit in a perfectly competitive market. This characteristic is crucial because it ensures that any firm can enter the market if it believes it can make a profit and exit if it cannot. This freedom keeps the market competitive and ensures that firms cannot sustain abnormal profits in the long run.
- Numerous Participants (Option C): The market consists of a large number of buyers and sellers, which means no single buyer or seller can influence the market price by altering the quantity of goods they supply or demand. This large number ensures that the action of any single entity will not affect the market’s overall supply and demand balance.
- Homogeneous Products (Option D): In perfect competition, the products offered by different firms are considered perfect substitutes for one another. This homogeneity is a crucial aspect because it means that consumers do not prefer one product over another if priced the same. Option D is incorrect because it suggests product differentiation, which is not a characteristic of perfect competition but rather of monopolistic competition or other less competitive markets.
In essence, perfect competition describes a theoretical market where numerous small firms produce identical products, leading to price taking behavior where no single firm can influence market prices. This setup results in optimal distribution of resources and welfare maximization, which are the theoretical ideals of economic efficiency.