Question

Question 1: Explain the disadvantages that firms in a perfect competition market have to face.

Answer 1

Perfect competition is a market structure where all firms sell an identical product and are termed price takers because they cannot control the market price of their product as the buyers have complete knowledge about the product. Thus as the competition is high any attempt by the individual firm to increase the price of a good or service will result in loss of revenues as customers switches to other firms. The main disadvantages of perfect competition are:

-- There is a lack of product variety.

-- No economies of scale.

-- In perfect competition lack of competition over product design and specification can be seen.

--Insufficient profits for investment.

-- Unequal distribution of goods and income is observed.

-- As goods are almost identical thus there is no choice.