Question

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________.
1. Oligopoly
2. Imperfect competition
3. Monopolistic competition
4. Perfect competition

Answer 1

Correct Answer - Option 4 : Perfect competition

The correct answer is Perfect competition.

• In a perfect competition market structure, there are a large number of buyers and sellers. All the sellers of the market are small sellers in competition with each other.
• There is no one big seller with any significant influence on the market. So all the firms in such a market are price takers. Hence option 4 is correct.
• Perfect Competition:
  • Participants are high both buyers and sellers.
  • Products have many substitutes and no marketing or selling cost is incurred.
  • Knowledge of participants for entering into the market is perfect.
  • The seller is a Price taker, not a price maker.
  • The buyer willing to buy all at a certain price but none at price higher. So he is a price maker.

• Monopoly:
  • Buyers are many but the seller is one.
  • Product has no substitute or no close substitute
  • Other competitors can't enter the market due to laws or patents.
  • Price discrimination is seen between poor and rich. Seller is a Price maker.
  • Relative Price inelastic increase means demand decreases by less than X% for an X% increase in price.
  • A natural monopoly is when there is an extremely high fixed cost of distribution e.g. gas, water, electricity.
• Monopolistic competition:
  • Many buyers and sellers but each selling its differentiated version of good.
  • Marketing selling cost is high. Goods are of different brands where brand loyalty is seen to a limit but many substitutes are available.
  • Unrestricted and free entry.
  • Seller is Price maker to a level.
  • Price increases by x% but demand decreases by less than x% - relatively inelastic. But more elastic than monopoly.
• Oligopoly:
  • Buyers many but sellers few with intense competition.
  • Product has close substitutes and intense competition amongst sellers. If one seller introduces change others have to follow. High cost of marketing and selling.
  • Entry of new sellers tough due to economies of scale.
  • The seller is a price maker.
• Monopsony:
  • The monopoly of the buyer but multiple sellers present.
  • Entry closed for other buyers
  • Seen where the government wants to make a defense-related purchase and multiple sellers are bidding for it.
  • The buyer is a price maker.