ACCA Performance Management (F5) Certification Practice Exam

What characteristic defines a perfectly competitive market?

1. High entry and exit barriers

2. Buyers and sellers are price makers

3. Homogeneous products

4. Imperfect information

The correct answer is: Homogeneous products

In a perfectly competitive market, one of the defining characteristics is that products are homogeneous, meaning that the goods offered by different producers are identical in nature and features. This implies that consumers perceive no difference in quality or utility between products from various suppliers, which leads to perfect substitutability. In such a market structure, since the products are indistinguishable from one another, individual firms cannot influence the market price; they must accept the prevailing market price determined by overall supply and demand. This characteristic of homogeneous products ensures that competition is based on price alone. If one seller attempts to charge a higher price than the market price, consumers will simply switch to identical products offered by competitors, thus eliminating any individual seller's power over pricing. Therefore, the presence of homogeneous products is crucial for maintaining the competitive nature of a perfectly competitive market, where no single seller can enjoy significant market power.