Question

Explain the implications of the following in a perfectly competitive market :
a) Large number of buyers
b) Freedom of entry and exit to firms

Answer 1

(i) Large number of buyers: In a perfectly competitive market, there are large number of buyers. The number of buyers is so large that no individual buyer by changing his demand can affect the total market demand for the commodity. An individual buyer has no control over the existing market price and cannot influence it and therefore an Individual buyer Is a price taker anent a price maker.

(ii) Freedom of entry and exit to firms: There is no restriction on the entry and exit of old and new firms. This feature is available only in the long run and not in the short run, as in the short run some factors are fixed, which obstructs the free entry and exit of firms. This feature has an important implication that all the firms in the long run get only normal profit or zero economic profit. If there exists abnormal profits in the short run, then the new firms will enter in the market in the long run. On the other hand, if the firms are earning abnormal losses, then some of the existing firms will exit the market in the long run. This free entry and exit of the firms ensures that in the long run no firm earns either abnormal losses or abnormal profits, i.e. all firms earns zero economic profit (normal profit).