Which of the following is the best example of a perfectly competitive market? A. athletic shoes B. diamonds C. farming D. soft drinks E. electricity distribution
The correct answer and explanation is:
Correct Answer: C. Farming
A perfectly competitive market is one in which there are many buyers and sellers, all selling identical or nearly identical products. In such markets, no single buyer or seller has the power to influence the price. Instead, the price is determined by the overall forces of supply and demand. Other key features include easy entry and exit from the market and full access to market information by all participants.
Farming, particularly the production of basic crops like wheat, corn, or rice, is one of the best real-world examples of perfect competition. This is because there are numerous farmers, none of whom can control the market price. The products from different farms are generally very similar, making them perfect substitutes. Buyers do not prefer one farmer’s wheat over another’s since the product is largely the same. This makes the market price the same for all farmers, who must accept the prevailing market rate.
In contrast, athletic shoes (A), soft drinks (D), and diamonds (B) are branded products that differ in style, quality, and consumer perception. Companies that produce these goods often engage in advertising and brand differentiation, which gives them some degree of pricing power. For example, Nike and Coca-Cola have strong brand identities and can charge higher prices, which is not characteristic of a perfectly competitive market.
Electricity distribution (E) is usually a natural monopoly because of the high infrastructure costs and regulation involved. There is typically one provider in a given area, meaning there is no real competition.
Therefore, among the given options, farming best fits the criteria of perfect competition due to the large number of small producers, homogeneous products, and a lack of pricing power by individual sellers.