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Perfect Competition: Defining Features Video Lecture | Economics CUET Preparation - Commerce

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FAQs on Perfect Competition: Defining Features Video Lecture - Economics CUET Preparation - Commerce

1. What is perfect competition in commerce?
Ans. Perfect competition in commerce refers to a market structure where there are many buyers and sellers who are selling homogeneous products. In this type of market, no single buyer or seller has the power to influence the market price. All firms are price takers, meaning they have to accept the market price set by the forces of demand and supply.
2. What are the defining features of perfect competition?
Ans. The defining features of perfect competition include: - Many buyers and sellers: There are numerous buyers and sellers in the market, none of whom have a significant market share. - Homogeneous products: All firms sell identical products, which are perfect substitutes for each other. - Perfect information: Buyers and sellers have access to complete information about prices, quality, and other relevant market factors. - Free entry and exit: Firms can enter or exit the market easily without any barriers. - Price takers: All firms accept the market price and cannot influence it.
3. How does perfect competition affect market prices?
Ans. In perfect competition, market prices are determined by the forces of demand and supply. Since all firms are price takers, they have to accept the prevailing market price. If a firm tries to charge a higher price, buyers will switch to other firms offering the same product at a lower price. Similarly, if a firm charges a lower price, it will not gain a significant advantage as other firms will also lower their prices. As a result, the market price settles at a level where demand and supply are in equilibrium.
4. What are some advantages of perfect competition?
Ans. Perfect competition offers several advantages, including: - Efficient allocation of resources: In a perfectly competitive market, resources are allocated efficiently as firms produce at the lowest possible cost and consumers are able to buy goods at the lowest possible price. - Consumer sovereignty: Since buyers have access to perfect information and a wide range of choices, they have the power to determine which products succeed in the market. - Innovation and productivity: Firms in perfect competition are constantly trying to improve their products and production processes to gain a competitive edge, leading to innovation and increased productivity.
5. Are there any disadvantages of perfect competition?
Ans. While perfect competition has its advantages, it also has some disadvantages, such as: - Lack of economies of scale: In perfect competition, firms are relatively small and operate at their most efficient scale. This means they may not benefit from economies of scale, which can limit their ability to reduce costs and invest in research and development. - Lack of market power: Since all firms are price takers, they have limited ability to set prices and earn supernormal profits. This can discourage firms from investing in long-term projects or taking risks. - Potential for market failure: Perfect competition assumes perfect information and rational behavior by all market participants. In reality, information may be imperfect and buyers and sellers may not always act rationally, leading to market failures such as externalities or unequal distribution of resources.
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