Association of Chartered Certified Accountants (ACCA) Certification Practice Test

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What defines a market that is classified as perfect competition?

  1. A market with many firms producing unique goods

  2. A market with many firms producing identical goods and perfect knowledge

  3. A market with one dominant firm setting prices

  4. A market with limited consumer access to information

The correct answer is: A market with many firms producing identical goods and perfect knowledge

A market characterized by perfect competition is defined by several key features, among which is the presence of many firms producing identical goods. In such a market, these firms have no control over market prices and must accept the prevailing price determined by the overall supply and demand in the market. Additionally, perfect knowledge among consumers and producers is crucial. This means that all participants are fully aware of prices, products, and available alternatives, allowing consumers to make informed choices and encouraging firms to operate efficiently. The homogeneity of goods ensures that no single firm can influence the market, resulting in a scenario where firms must compete on efficiency and cost rather than on product differentiation. In contrast to this, the other options describe conditions that diverge from the principles of perfect competition. Markets with many firms producing unique goods describe monopolistic competition, while a market dominated by a single firm indicates a monopoly. Finally, limited consumer access to information undermines the foundational aspect of perfect knowledge necessary for a perfectly competitive market. Therefore, the definition accurately encapsulates what constitutes a perfect competition market structure.