Future Business Leader Achievments (FBLA) Economics Practice Exam

What is a defining characteristic of perfect competition?

1. No single buyer or seller can influence price

2. Barriers to entry are high

3. Products are differentiated

4. Firms have significant market power

The correct answer is: No single buyer or seller can influence price

The defining characteristic of perfect competition is that no single buyer or seller can influence price. In a perfectly competitive market, the number of firms is large, and each firm produces a relatively small portion of the total market supply. Because of this, individual firms are "price takers," meaning they accept the market price as given and can't influence it through their own production decisions. The presence of many buyers and sellers ensures that competition drives the price to an equilibrium where supply equals demand, resulting in an efficient allocation of resources. In contrast, markets with high barriers to entry, like monopolies or oligopolies, limit competition and allow firms to exercise market power, leading to price-setting behavior. Differentiated products are typical in monopolistic competition, where firms do have some control over pricing due to brand loyalty or unique product features. In markets characterized by significant market power, firms can influence the price of their goods, which runs counter to the principles of perfect competition. Thus, the essence of perfect competition hinges on the inability of individual participants to manage prices, supporting option A as the correct answer.