What is the characteristic of purely competitive market ?

Question

Accepted Answer

The correct option is 1:
The hallmark of a purely competitive market is the existence of a very Large number of buyers and sellers. This condition is fundamental because it ensures that all individual participants are "price takers." When there are so many independent firms and consumers, the output or consumption decision of any single entity is insignificant relative to the total market, meaning no one seller can raise the price without losing all their business, and no one buyer can force the price down. This multitude of market participants is one of the pillars—along with homogeneous products, perfect knowledge, and free entry/exit—that defines a pure or perfect competition market structure.

The incorrect option is 2:
The characteristic of A few sellers does not apply to pure competition; instead, it is the defining feature of an **oligopoly**. In an oligopoly, a small number of firms dominate the market and are strategically interdependent, meaning each firm's actions significantly impact its rivals. This structure often leads to collective market power and complex pricing behavior, which fundamentally contradicts the price-taker principle of pure competition.

The incorrect option is 3:
Similarly, A few buyers is not a characteristic of pure competition. This condition describes an **oligopsony**, a market where a small number of large buyers exercise considerable market power over a large number of sellers. Since pure competition requires a large number of both buyers and sellers for the price-taking mechanism to function, the presence of only a few buyers would grant those buyers price-setting ability, immediately moving the market away from a purely competitive structure.

The incorrect option is 4:
Abnormal profit (or supernormal profit) is earned in a purely competitive market only in the **short run**. In the long run, the characteristic of free entry and exit will eliminate abnormal profits. If firms are earning supernormal profits, new firms will enter the market, increasing supply and pushing the market price down until economic profits return to zero (normal profit). Therefore, abnormal profit is a temporary outcome, not a defining, long-run characteristic of the purely competitive market structure.