Economics: Characteristics of a Perfectly Competitive Market

Running head: ECONOMICS
Economics
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ECONOMICS1
Table of Contents
Answer 1....................................................................................................................................................2
Answer 2....................................................................................................................................................2
Answer 3....................................................................................................................................................4
Answer i.................................................................................................................................................4
Answer ii................................................................................................................................................5
Answer iii...............................................................................................................................................5
Answer iv...............................................................................................................................................6
References..................................................................................................................................................7

ECONOMICS2
Answer 1
Local rice market is an example of perfectly competitive market participating in daily life.
Several characteristics of rice market resemble the characteristic of perfectly competitive market.
Given below are the four main characteristics of rice market indicating features of perfectly
competitive market.
Large number of buyers and sellers
Perfectly competitive market is characterized by presence of large number of buyers and sellers.
There are various sellers in the rice market selling rice (Waldman & Jensen, 2016). As rice is one of the
necessities, numerous buyers participate in the market.
Nature of the good
In a competitive market, seller sell identical or homogenous good. Therefore, goods sold by
each seller are perfect substitutes to each other. Similar is the case of rice market. Rice sold in the
market are homogenous good like that of a perfectly competitive market.
Free entry and exit
Seller in the perfectly competitive market can freely enter or exit the industry. New firms enter
the market when there are supernormal profit. Firms exit the industry when existing firm suffers a loss.
In the rice market, there are no barriers for entry or exit of firms. There is neither regulatory nor any
other barriers that local sellers in the market face.
Perfect knowledge
In the perfectly competitive market, buyers and sellers have perfect knowledge regarding the
market. That means no seller or buyer is ignorant regarding prevailing price in the market. Similar is
the case of local rice market (Belleflamme & Peitz, 2015). All buyers and sellers have complete
knowledge about the market. Neither of them has any influence on market price. Sellers are price takers
in the market.
Answer 2
Price elasticity of supply is a measure to estimate relative responsiveness of quantity supplied
for a certain proportionate change in price. If supply changes by a greater proportion relative to price,
then supply is considered as relatively elastic. In contrast, if change in supply is larger than associated