CMA Foundation · Fundamentals of Business Economics and Management · Forms of Market
Which of the following is a defining feature of a perfectly competitive market?
Firms in perfect competition are price takers because the product is homogeneous and every firm is too small relative to the market to influence price. Downward-sloping demand, entry barriers and advertising-led differentiation are features of imperfectly competitive markets, not perfect competition.
- AEach firm faces a downward-sloping demand curve for its product
- BFirms are price takers because each sells a homogeneous product and is too small to influence priceCorrect
- CEntry of new firms is blocked by legal barriers
- DFirms spend heavily on advertising to differentiate their products
Explanation
In perfect competition there are many buyers and sellers dealing in identical products, so no single firm can affect the market price. A downward-sloping firm demand curve, barriers to entry and product differentiation belong to imperfect markets such as monopoly or monopolistic competition.
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