(a) What is a market? [4 marks] (b) Explain the main features of a perfectly competitive market. [16 marks]

Answer Details

(a) A market is any arrangement, place or situation that brings buyers and sellers of a good or service into contact so that they can carry out transactions and determine a price. It need not be a physical location; contact by telephone or the internet also forms a market.

(b) Main features of a perfectly competitive market:

1. Very many buyers and sellers: each buyer and seller is so small relative to the whole market that no one of them can influence the price; every firm is a price taker.
2. Homogeneous product: all firms sell an identical (uniform) product, so buyers have no reason to prefer one seller to another.
3. Freedom of entry and exit: there are no barriers, so firms can enter the industry when profits are high and leave when they make losses.
4. Perfect knowledge: buyers and sellers have full information about prices and market conditions, so the same price rules throughout the market.
5. Perfect mobility of factors of production: resources can move freely from one use or place to another.
6. No transport costs and no government interference, so a single uniform price prevails.

Because of these conditions, a single ruling price is established and each firm faces a perfectly elastic (horizontal) demand curve.