Which of the following is not a characteristic of a competitive market...
Introduction:
A competitive market is a market structure in which there are many buyers and sellers who are engaged in buying and selling identical goods or services. In a competitive market, firms have no control over the price and must accept the market price determined by the forces of supply and demand. In this context, we will discuss the characteristic of a competitive market that is not applicable.
Explanation:
The characteristic of a competitive market that is not applicable is option C, which states that firms generate small but positive supernormal profits in the long run. This statement is incorrect because in a competitive market, firms are unable to generate supernormal profits in the long run.
Characteristics of a competitive market:
To understand why option C is not a characteristic of a competitive market, let's review the other characteristics of a competitive market:
1. Many buyers and sellers: In a competitive market, there are a large number of buyers and sellers. No individual buyer or seller has the power to influence the market price.
2. Homogeneous goods: The goods offered for sale in a competitive market are largely the same. This means that buyers perceive the goods as identical and are willing to switch between sellers based on price alone.
3. Price takers: In a competitive market, firms are price takers, meaning they have no control over the price. They must accept the market price determined by the forces of supply and demand.
4. Free entry and exit: Firms can freely enter or exit the market without any barriers. This means that new firms can easily enter the market if they perceive an opportunity for profit, and existing firms can exit if they are unable to compete.
5. Normal profits in the long run: In the long run, firms in a competitive market earn only normal profits, which are just enough to cover their costs of production. This is because if firms were able to generate supernormal profits, it would attract new firms to enter the market and compete away those profits.
Conclusion:
In conclusion, the characteristic of a competitive market that is not applicable is option C, which states that firms generate small but positive supernormal profits in the long run. In reality, firms in a competitive market earn only normal profits in the long run, as the forces of competition drive prices down to the point where firms are just covering their costs of production.
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