Association of Chartered Certified Accountants (ACCA) Certification Practice Test

What characterizes a situation of imperfect competition in a market?

1. A market with only one producer

2. A market with many producers but not perfectly competitive

3. A market with a few dominant producers only

4. A market where products are identical

The correct answer is: A market with many producers but not perfectly competitive

Imperfect competition is characterized by a market where many producers exist, but none of them have complete control over the market price, allowing for variations in product offerings, pricing, and other competitive strategies. This scenario can include monopolistic competition, where firms compete on factors other than price, leading to differentiated products that provide consumers with choices beyond just price. In a market with many producers but not perfectly competitive, these producers do not fully meet the criteria for a perfectly competitive market, where all firms sell identical products, and no single firm can influence the market price. In imperfect competition, firms have the ability to set prices above marginal cost due to product differentiation or branding, leading to some price-setting power. This stands in contrast to a perfectly competitive market, where firms are price takers. The other options depict distinct market structures: having only one producer defines a monopoly, while a market with a few dominant producers suggests an oligopoly. A market where products are identical aligns with perfect competition, not imperfect competition, as there is no differentiation among products. Thus, the choice highlighting many producers without perfect competition captures the essence of imperfect competition accurately, recognizing that while there are multiple firms, market dynamics allow for price-setting abilities and product diversity.