Perfect Competition

Now, before you start answering the questions below let’s do a quick revision of this concept. Perfect competition is a hypothetical market where there are a large number of buyers and sellers selling homogeneous products. This indicates that all the products are perfect substitutes for each other. 

All the sellers sell the product at a uniform price. There is no monopoly and the sellers are price takers. This means that the sellers don’t have the power to influence the prices of the products available in the market. 

Even if a seller raises the price of their products even by a single rupee all the customers will rush to buy products from its competitors. This is because the products available in the market are homogeneous in nature and there are a lot of sellers. 

Similarly, buyers cannot influence the price of the products by influencing the demand. The prices of the products are decided by the forces of demand and supply.

There is free entry and exit for all the firms. Both the buyers and sellers have all the knowledge about the product. Since the buyers already know everything about the product there is a need for advertising.

All the factors of production i.e. labour, raw material and capital have total mobility. This means these factors of production can move from one place to another without any restrictions. 

It is assumed that in a perfectly competitive market all sellers are equally near or farther away from the market. This means that there is no cost for transporting goods and services. Due to this the overall production cost and selling price are the same everywhere. 

There is no intervention of the government in the perfect competition market. Government cannot change the supply or prices of the products.

MCQs:

1. Which one is the characteristic of perfect competition?

1. 1. It has a large number of buyers and sellers selling homogeneous products at a uniform price.

   2. There is no free entry and exit for all the firms.

   3. It has a large number of buyers and sellers where the government decides the price of the product.

   4. It has a large number of buyers and sellers selling heterogeneous products at a uniform price.

Answer: A

2. Which of the following options is not the characteristics of the perfect competition market.

1. 1. Sellers selling homogeneous products.

   2. Free entry and exit for the firms.

   3. No intervention by the government.

   4. Sellers spend a huge amount of money on advertising.

Answer: D

3. Which option shows the distinguishing feature between perfect and monopolistic competition?

1. 1. In perfect competition, there exist homogeneous products but in monopolistic competition, the products are different from one another.

   2. Barriers to entry are present in the perfect competition but in the perfect competition, there are no barriers to entry.

   3. Monopolistic competition faces many barriers to entry but there is no such problem in perfect competition.

   4. In perfect competition goods sold by the sellers are different from one another while the goods sold in the monopolistic market are identical.

Answer: A

4. Sellers selling homogeneous products in the perfect competition market indicate?

1. 1. A huge amount of loss for all the sellers.

   2. Buyers will not buy the products.

   3. Sellers will become price makers.

   4. Sellers cannot influence the prices of the products.

Answer: D

5. Which of the following options creates a barrier to entry for new firms?

1. 1. A rule of law that protects the existing firms in the market from the new firms.

   2. Increased competition in the market deters new firms from entering.

   3. No firm can create a barrier to entry.

   4. Huge losses made by the existing firms in the market deter new firms from entering.

Answer: A

6. Which of the following statements is true in the case of a perfect competition market?

1. 1. There is intervention by the government.

   2. Buyers are the price maker.

   3. There is no transportation cost.

   4. All the products are sold at different prices.

Answer: C

7. Which of the following markets have a few numbers of firms.

1. 1. Oligopoly

   2. Monopolistic competition

   3. Perfect competition

   4. Monopoly

Answer: D

8. Statement (1): Perfect competition hypothetical situation.

    Statement (2): Under perfect competition, the government decides the prices of all the products and services.

1. 1. (1) is correct and (2) is incorrect.

   2. (1) is incorrect and (2) is correct.

   3. Both (1) and (2) are correct.

   4. Both (1) and (2) are incorrect.

Answer: A

9. The elasticity of demand for the product in a single firm in the perfect competition is

1. 1. Zero because all the sellers are selling an identical product.

   2. Zero because all the sellers are selling heterogeneous products.

   3. Infinite because all the sellers are selling identical products.

   4. We cannot calculate the elasticity of demand for a product in perfect competition.

Answer: C

10. What is the unique feature of perfect competition concerning factors of production.

1. 1. All the factors of production have total mobility.

   2. All the factors of production don’t have total mobility.

   3. Only capital does not have mobility while other factors of production have total mobility.

   4. Only labour has total mobility.

Answer: A

11. In perfect competition how the prices of goods and services are decided?

1. 1. Demand and supply forces decide the prices of goods and services.

   2. The seller decides the prices of goods.

   3. Government influences the prices of goods.

   4. Buyers control the price level by influencing demand for the products.

Answer: A

12. Business owners in the perfect competition have to make different types of decisions, both short and long term. Which of the following options are short term decisions?

1. 1. Output levels that have a direct impact on profits.

   2. How much to spend on advertising.

   3. To enter the marketplace or take an exit.

   4. The price of the goods and services.

Answer: A

13. Sellers in perfect competition are:

1. 1. Price maker

   2. Price taker

   3. Wealthy

   4. Poor

Answer: B

14. Which of the following statements is true if the seller’s product is facing perfectly elastic demand?

1. 1. There are a lot of substitutes available Nik the market.

   2. The seller doesn’t have any motive to sell the products below the market price.

   3. The seller won’t be able to make a profit if he tries to sell the product above the market price.

   4. All of the above.

Answer: D

15. Sellers in the perfect competition are price takers because:

1. 1. Sellers get a lot of pressure from other competing firms to accept the prevailing equilibrium price in the market.

   2. Buyers influence the prices of products.

   3. Government forces the sellers to sell a product at a particular price.

   4. None of the above.

Answer: A

16. What will happen will the sellers increase the prices of their products:

1. 1. The seller will make a lot of profit.

   2. All the customers of the seller will rush to its competitors’ firms because they can get the same product at a lower price.

   3. Buyers don’t have an option to buy the same product.

   4. The seller will have to leave the marketplace.

Answer: B

17. How is the demand curve in a perfectly competitive market?

1. 1. The demand curve is a horizontal line at the market price.

   2. The demand curve is a vertical line at the market price.

   3. The demand curve is flat.

   4. The demand curve cannot be calculated.

Answer: A

18. How can perfect competition maximize profit?

1. 1. Firms must set marginal revenue equal to marginal cost (MR=MC).

   2. All the firms should increase the prices of the products.

   3. Sellers should create a scarcity of goods in the market.

   4. Buyers should buy the products at a lower price.

Answer: A

19. What industry is closest to perfect competition?

1. 1. The agricultural industry is the closest to the perfect competition because there are a lot of small producers which don’t have the power to influence the prices.

   2. The services industry is the closest to perfect competition since there is a huge number of buyers and sellers 

   3. There is no such industry which comes closest to the perfect competition.

   4. Both a and b.

Answer: A

20. Why is perfect competition unrealistic?

1. 1. In any marketplace, some firms can influence the prices of the products.

   2. Advertising and transportation costs exist.

   3. There is always free entry and exit.

   4. All of the above.

Answer: D

21. Why is there no need for sellers to spend money on advertising?

1. 1. Since all the buyers have perfect knowledge of all the products available in the market there is no need for sellers to spend money on advertising.

   2. Sellers want to save money.

   3. The government has struck restrictions on the advertisement.

   4. All of the above.

Answer: A

22. Firms in a perfectly competitive market can only make profits or losses in the short run because:

1. 1. There is no government intervention.

   2. There are no advertising or transportation costs.

   3. There is an infinite number of firms producing infinite homogeneous products.

   4. All the factors of production have total mobility.

Answer: C

23. Which of the following statements about perfect competition are true?

1. 1. Both the buyers and sellers know all the details about the products available in the market.

   2. Buyers can change the prices of the products by influencing demand.

   3. Products are sold at different prices.

   4. Firms are price makers.

Answer: A