Future Business Leader Achievments (FBLA) Economics Practice Exam

What is a key feature of perfect competition in an industry?

1. Presence of many buyers and sellers

2. Ability for firms to set prices

3. Existence of barriers to entry

4. Product differentiation

The correct answer is: Presence of many buyers and sellers

In a perfectly competitive market, a key feature is the presence of many buyers and sellers. This characteristic ensures that no single buyer or seller can influence the market price of the goods or services being traded. Instead, these market participants act as price takers, accepting the market price determined by the forces of supply and demand. The abundance of buyers and sellers contributes to a highly competitive environment where products are homogeneous, meaning they are identical or very similar, leading to minimal differentiation. This scenario fosters efficiency in resource allocation, as firms in perfect competition strive to achieve equilibrium in supply and demand without the ability to manipulate pricing. In contrast, the other features—like firms setting prices, barriers to entry, and product differentiation—are typically associated with different market structures, such as monopolies or monopolistic competition.