All firms in a perfectly competitive market charge the same market price. One firm now raises its price above the market price and loses all its buyers. Which two features of perfect competition together explain why it loses all its buyers?
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → All firms produce the same good, and all buyers are aware of the market price.
Buyers leave the firm because they can get the same good elsewhere and they know it is cheaper there. These two features together send every buyer to the other firms.
Free entry and exit, and the large number of buyers, keep many firms in the market, but they do not explain why this firm’s buyers leave.
NCERT (2026-27): “4.1 Perfect Competition: Defining Features … Price-taking is often thought to be a reasonable assumption when the market has many firms and buyers have perfect information about the price prevailing in the market. … Let us start with a situation where each firm in the market charges the same (market) price. Suppose, now, that a certain firm raises its price above the market price. Observe that since all firms produce the same good and all buyers are aware of the market price, the firm in question loses all its buyers. …” |