Future Business Leader Achievments (FBLA) Economics Practice Exam

Which type of market is characterized by many firms selling similar products?

1. Monopoly

2. Oligopoly

3. Perfect competition

4. Monopolistic competition

The correct answer is: Perfect competition

The correct answer is perfect competition, which is characterized by a large number of firms selling identical or very similar products. In a perfectly competitive market, no single firm has significant market power, meaning that they are price takers rather than price makers. This leads to a situation where the products offered are largely interchangeable, resulting in consumers being indifferent to which firm's product they choose as long as the price is the same. In this market structure, the conditions are such that there are no barriers to entry or exit, allowing new firms to enter the market freely and drive prices down to a level where only normal profits can be made. This results in efficient resource allocation and ensures that prices reflect the true cost of production. The other options represent different market structures where the number of firms and the differentiation of products vary significantly, impacting competition and pricing. In monopoly, a single firm dominates the entire market, leading to unique product offerings without direct competition. Oligopoly involves a few firms that may sell similar or differentiated products, but they have more control over pricing due to limited competition. Monopolistic competition features many firms selling products that are differentiated enough to allow for some degree of price-setting power, indicating a departure from the identical products seen in perfect competition.