CIPS Exam L4M5 Topic 12 Question 64 Discussion

Actual exam question for CIPS's L4M5 exam

Question #: 64
Topic #: 12

Which of the following are most likely to be characteristics of a perfectly competitive market? Select TWO that apply

AIn a competitive market, both buyers and sellers are price givers

BFirms can freely enter or exit the market

CIn a perfectly competitive market, each seller has a large impact on the market price
A perfectly competitive market consists of products that are all slightly different from one another

DThere are many buyers and sellers in the market

Show Suggested Answer

Suggested Answer: B, D

A perfectly competitive market is one with the following features:

- There are many firms producing identical or very similar (homogeneous) goods or services

- There are no barriers to entry to the market or exit from the market - anyone can enter or leave easily

- Both producers and customers have perfect knowledge of the market place, prices, costs of production and influences on demand and supply

Under these conditions, the price and quantity will always tend toward equilibrium as any producer that sets a price above equilibrium will not sell anything at all, and any producer that sets a price below a equilibrium will obtain 100% market share in theory. The demand curve is perfectly elastic, which means that it will be horizontal. In a perfectly competitive market, it is difficult to increase profits through pricing, and suppliers instead must focus on their cost structure. As these conditions imply, there are few if any examples of perfectly competitive market.

LO 2, AC 2.2

by Willie at Jul 06, 2024, 11:13 PM

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I agree with you, Maricela. In a competitive market, both buyers and sellers are price givers, and firms can freely enter or exit the market.

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Maricela

5 months ago

I think A and B are the characteristics of a perfectly competitive market.

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