In a perfectly competitive industry, each firm:
a. produces a standardized product.
b. produces a differentiated product.
c. produces about half of the total industry output.
The correct answer and explanation is:
The correct answer is a. produces a standardized product.
In a perfectly competitive industry, firms produce a standardized or homogeneous product, meaning the products are identical and cannot be distinguished from one firm to another. This is one of the defining characteristics of perfect competition.
In perfect competition, there are many firms in the industry, each of which is a price taker. This means that no single firm has the power to influence the market price of the product. The products they offer are considered perfect substitutes for each other. For example, in a perfectly competitive market for wheat, one firm’s wheat is identical to another firm’s wheat, and consumers do not have any preference for wheat from one firm over another.
Due to the nature of standardized products, consumers can easily switch between suppliers without any loss in quality. This makes it difficult for firms to charge prices higher than the market price, because if they do, consumers will simply purchase the product from other firms. As a result, firms in a perfectly competitive market will always produce at the point where their marginal cost equals the market price, and they cannot make long-term profits due to the easy entry of new firms into the market.
In contrast, in markets with differentiated products, such as in monopolistic competition or oligopoly, firms can influence prices and differentiate their products through branding, features, or quality. Here, each firm does not face identical competition, and consumers may have preferences for specific brands or types of products.