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Question

In a perfectly competitive market, the buyers treat products of all the firms as homogeneous. Explain the significance of this feature.

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Solution

In a perfectly competitive market, the products of all firms are homogeneous. The significance of this feature is as below:

(i) The buyers find that the products are homogenous, so only one price can prevail in the market.

(ii) If an individual firm tries to charge a higher price, it would lose all its buyers to the competing firms. Accordingly, exploitation of the consumer is ruled out.

(iii) Homogeneous product does not allow a firm to possess any control over its price. Accordingly, the firm's demand curve (under perfect competition) becomes a horizontal straight line.


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