Question

In perfect competition, the seller is a price maker.
A) True
B) False

Answer 1

Hint: Perfect competition describes a market structure where competition is at its greatest possible level but ideally, perfect competition is a hypothetical situation that cannot possibly exist in a market. However, perfect competition is used as a base to compare with other various forms of market structure.

Complete answer:
A market that exhibits the following characteristics in its structure is considered to show perfect competition:
1. A Large number of buyers and sellers are present.
2. Homogenous product is produced by every firm.
3. Also free entry and exit of firms.
4. Zero advertising cost required.
5. Consumers have perfect knowledge about the market and also well aware of various changes in the market. The most important is consumers indulge in rational decision making.
6. All the factors of production like labour, capital, etc, have perfect mobility in the market and are not hindered by any market factors or market forces.
7. No government intervention is seen.
8. No transportation costs involved.
9. Each firm earns normal profits and also no firms can earn super-normal profits.
10. Every firm is a price taker i.e it takes the price as decided by the forces of demand and supply.

Perfect competition is a type of market where there is a large number of buyers and sellers who deals inhomogeneous product due to which no individual unit is able to influence the price of the product and the firms have to quote the price that prevails in the market, thus the seller is a price taker.

Therefore above statement is false i.e, option ‘B’ is the correct answer.

Note: Perfect competition leads to the Pareto-efficient allocation of economic resources because of this it serves as a natural benchmark against which to contrast other market structures. However, in reality, very few industries can be described as perfectly competitive.