Association of Chartered Certified Accountants (ACCA) Certification Practice Test

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What characterizes imperfect competition?

Perfect differentiation and monopoly power
Market conditions where there is only one producer
A market that is not perfectly competitive
Highly regulated market environments

The correct answer is: A market that is not perfectly competitive

Imperfect competition is characterized by market conditions that do not conform to the principles of perfect competition. In a perfectly competitive market, numerous buyers and sellers exist, products are homogeneous, and there are no barriers to entry or exit. However, imperfect competition refers to scenarios where these conditions are not fully met, meaning that the market may have a limited number of sellers, product differentiation, or significant barriers to entry. In this context, the correct choice highlights that imperfect competition encompasses a variety of market structures, such as monopolistic competition, oligopoly, and monopoly, where elements like product differentiation and varying degrees of market power are present. This distinguishes it from the rigid structure of perfect competition, where market forces operate without any distortions.