Posted by Anjali Kaur on Sep 19, 2020

What is the Perfect Market?

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Let’s have a look at your query first.

These questions are related to the perfect competition market or perfect market. I will go step by step and answer it.

Q1. What is market?

Answer. Market refers to a place where the buyers and sellers for a commodity come in contact with each other to do a transaction related to buying or selling a commodity.

When I say buyer, it means demand curve and when I say seller, it means supply curve. So, when they come in contact means, where the demand curve and supply curve cut each other, that is, the equilibrium point. As shown below:

Q2. What are the types of markets?

Answer. There are 2 main types of markets:

Perfectly competitive market or Perfect competition or perfect market
The imperfect competition includes monopoly, monopolistic, and oligopoly markets.

Q3. What is the perfect market?

Answer. A perfect market is also known for perfect competition or a perfectly competitive market.

In a perfect market, there is a large number of buyers and sellers. All the firms (which are part of the industry) in this type of market produce homogeneous (which means identical) and undifferentiated (no difference) products.

Each firm under perfect market is consider to be a price taker.

Why?

Because the product sold by each firm is exactly identical and there is no difference. Even if any firm tries to sell at a higher price, the buyer will switch to the other firm. No firm can change the price set by the industry.

Q4. What is the shape of the demand curve under perfect market?

Answer. The perfect market firm faces a horizontal demand curve because the prices are fixed by the market (or industry) demand and supply curve and it can not change. The individual firm accepts the price fixed by the market. As shown below:

Q5. What is the implication of a horizontal demand curve of an individual firm in a perfect market on price?

Answer.

It means perfect market faces a horizontal or perfectly elastic demand curve. The prices are set by the industry and the firms are just the price taker. Any individual firm in a perfect market cannot influence the price. Firms can sell as much as possible at the fixed price and they can not change the price at all.

Firms are free to leave the industry, but they do not have any impact on the prices.

Q6. Briefly discuss perfect information and no collision as the characteristics of the perfect market.

Answer. The perfect market has several characteristics or features. Let’s answer what’s asked in the question:

1. Perfect Information:

It means both buyers and sellers have the perfect knowledge about the market, product, the cost involved, etc. Both buyers as well as sellers are aware of the price prevailing in the market. As a result, only 1 price prevails in the market. No individual firm can change the price or the quality of the commodity.

2. No Collision:

Since there exists perfect knowledge and freedom to enter and exit the market. There are no legal restrictions at all.

None of the firms is competing with the other firm, as the products are identical and prices are fixed. Every buyer is aware of the product quality and the prices. Therefore, there is no collision or competition among individual firms to increase their market share.

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