A perfectly competitive market in an economy is categorized by the following features.
(A) Firms are price-takers.
(B) Average revenue is equal to market price.
(C) Market is perfectly inelastic.
(D) Marginal revenue is equal to market price.
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → (A), (B) and (D) only
(A) Firms are price-takers. — Correct. Each firm takes the market price as given and can sell any amount at that price.
(B) Average revenue is equal to market price. — Correct. Average revenue (AR) is total revenue per unit of output. Total revenue is p × q, so AR = p.
(C) Market is perfectly inelastic. — Incorrect. The demand curve that a firm faces in this market is perfectly elastic, a horizontal line at the market price.
(D) Marginal revenue is equal to market price. — Correct. Marginal revenue (MR) is the increase in total revenue from one more unit. Each extra unit brings in the market price, so MR = p.
NCERT (2026-27): “4.1 Perfect Competition: Defining Features … A perfectly competitive market has the following defining features: 1. The market consists of a large number of buyers and sellers 2. Each firm produces and sells a homogenous product. i.e., the product of one firm cannot be differentiated from the product of any other firm. 3. Entry into the market as well as exit from the market are free for firms. 4. Information is perfect. …These features result in the single most distinguishing characteristic of perfect competition: price taking behaviour.… A price-taking firm believes that if it sets a price above the market price, it will be unable to sell any quantity of the good that it produces. On the other hand, should the set price be less than or equal to the market price, the firm can sell as many units of the good as it wants to sell.… …In other words, for a price-taking firm, average revenue equals the market price.… …The price line also depicts the demand curve facing a firm. Observe that the demand curve is perfectly elastic. This means that a firm can sell as many units of the good as it wants to sell at price p.… …In other words, for a price-taking firm, marginal revenue equals the market price.…” |