A market, in which there are a large number of firms, homogeneous product, infinite elasticity of demand for an individual firm and no control over price by firms, is termed as
- A.oligopoly
- B.imperfect competition
- C.monopolistic competition
- D.perfect competition
Correct answer
Explanation
The correct answer is D, perfect competition. Many sellers of an identical product, none of whom can change the price, is the definition of a perfectly competitive market.
Under perfect competition each firm is so small compared with the whole market that it must accept the price set by total demand and supply; it is a price taker. If it raised its price even slightly it would lose all its buyers, because the product of every other firm is the same. That is why the demand curve facing a single firm is a horizontal line, which means its price elasticity of demand is infinite. Free entry and exit and full knowledge of prices complete the model.
Option A is wrong because an oligopoly has only a few large firms that watch and react to one another's prices. Option B is wrong because imperfect competition is the general name for markets where firms have some control over price. Option C is wrong because under monopolistic competition products are differentiated by brand or design, so each firm faces a downward-sloping demand curve.
Exam tip: Perfect competition = price taker, horizontal demand curve, infinite elasticity.
Practice Questions
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