1. Please explain the principal elements and characterization of a perfectly competitive
markets and why are these markets not considered monopolistic?
2. Please describe what is meant by labor markets and how are capital, interest and profits
are interrelated.
Answers:
1. Perfect competition is a market structure in which the number of buyers and sellers is
very large, and are all engaged in buying and selling a homogenous product without any
restrictions and possessing perfect knowledge of the market. Perfect competition does not
exist in real world, however it is used as a standard to measure the effectiveness and
efficiency of real world markets.
Elements of a perfectly competitive market:
• Multiple buyers and sellers- the number of buyers and sellers should be large so none of
them individually is in a position to influence the price and industry as a whole. Also
because of the varied taste of buyers for homogeneity.
• Undifferentiated/ non-discreet goods and services- goods and services that can easily
yield to competition or to multiple buyers
• No transaction cost- the cost must be limited to the product the seller/ no additional cost
• No barriers to entry and exit of goods- relating to tariff and non tariff barriers; there
should be no tariffs or barriers to trade.
• No additional cost to elements of production- no additional cost to the reasonable price.
• No price control- there should be no government policy that somehow restrict the flow of
production.
• Perfect knowledge and information to the prices- buyers and sellers must possess
complete knowledge about the prices at which goods are being brought and sold and of
the prices at which others are prepared to buy and sell. This will help in having
uniformity in prices.
There are several differences between a monopolistic market and a perfectly competitive
market. In a monopolistic market, there is only one firm that has total market control.
While in a perfectly competitive market, which is composed of many firms, no one firm
has market control. In a monopolistic market, because firms have total control of the
markets and why are these markets not considered monopolistic?
2. Please describe what is meant by labor markets and how are capital, interest and profits
are interrelated.
Answers:
1. Perfect competition is a market structure in which the number of buyers and sellers is
very large, and are all engaged in buying and selling a homogenous product without any
restrictions and possessing perfect knowledge of the market. Perfect competition does not
exist in real world, however it is used as a standard to measure the effectiveness and
efficiency of real world markets.
Elements of a perfectly competitive market:
• Multiple buyers and sellers- the number of buyers and sellers should be large so none of
them individually is in a position to influence the price and industry as a whole. Also
because of the varied taste of buyers for homogeneity.
• Undifferentiated/ non-discreet goods and services- goods and services that can easily
yield to competition or to multiple buyers
• No transaction cost- the cost must be limited to the product the seller/ no additional cost
• No barriers to entry and exit of goods- relating to tariff and non tariff barriers; there
should be no tariffs or barriers to trade.
• No additional cost to elements of production- no additional cost to the reasonable price.
• No price control- there should be no government policy that somehow restrict the flow of
production.
• Perfect knowledge and information to the prices- buyers and sellers must possess
complete knowledge about the prices at which goods are being brought and sold and of
the prices at which others are prepared to buy and sell. This will help in having
uniformity in prices.
There are several differences between a monopolistic market and a perfectly competitive
market. In a monopolistic market, there is only one firm that has total market control.
While in a perfectly competitive market, which is composed of many firms, no one firm
has market control. In a monopolistic market, because firms have total control of the
