In a perfectly competitive market, how does the market price typically behave?

In a perfectly competitive market, how does the market price typically behave?

• A. Set by a single supplier
• B. Constant across all firms
• C. Varies significantly between firms
• D. Subject to manipulation

Answer: (B)

In a perfectly competitive market, the market price is typically constant across all firms because no single firm has the power to influence the price due to the presence of many buyers and sellers. Each firm is considered a price taker, meaning they accept the market price as given and sell their products at that price. This uniform pricing occurs because all firms are producing identical or very similar products, and consumers will always opt for the cheaper option if a firm tries to charge more. Furthermore, in a perfectly competitive market, if any firm were to set a price higher than the market equilibrium, it would not be able to sell its products, as consumers would buy from other firms that are selling at the equilibrium price. Conversely, if the price were set lower, the firm could attract more customers but would not be maximizing profits. Thus, the interaction of supply and demand in such a market leads to a stable market price that is the same for all firms. Other options reflect scenarios that do not occur in perfectly competitive markets: a single supplier would lead to monopoly conditions, significant price variation between firms indicates a lack of competition, and market manipulation typically occurs in less competitive environments.

In a perfectly competitive market, the market price is typically constant across all firms because no single firm has the power to influence the price due to the presence of many buyers and sellers. Each firm is considered a price taker, meaning they accept the market price as given and sell their products at that price. This uniform pricing occurs because all firms are producing identical or very similar products, and consumers will always opt for the cheaper option if a firm tries to charge more.

Furthermore, in a perfectly competitive market, if any firm were to set a price higher than the market equilibrium, it would not be able to sell its products, as consumers would buy from other firms that are selling at the equilibrium price. Conversely, if the price were set lower, the firm could attract more customers but would not be maximizing profits. Thus, the interaction of supply and demand in such a market leads to a stable market price that is the same for all firms.

Other options reflect scenarios that do not occur in perfectly competitive markets: a single supplier would lead to monopoly conditions, significant price variation between firms indicates a lack of competition, and market manipulation typically occurs in less competitive environments.