Association of Chartered Certified Accountants (ACCA) Certification Practice Test

Which characteristic does not apply to perfect competition?

1. Many firms producing identical goods

2. Significant barriers to entry

3. Perfect knowledge among consumers

4. Horizontal demand curve

The correct answer is: Significant barriers to entry

The characteristic that does not apply to perfect competition is the presence of significant barriers to entry. In a perfectly competitive market, one of the defining features is that there are no significant barriers to entry or exit for firms. This means that new firms can easily enter the market when they see an opportunity for profit, and existing firms can exit the market without facing substantial costs. This free entry and exit help to maintain the competitive nature of the market and ensure that economic profits tend toward zero in the long run. In contrast, significant barriers to entry can restrict competition and allow existing firms to earn sustained profits, which contradicts the principles of perfect competition. The other characteristics, such as many firms producing identical goods, perfect knowledge among consumers, and a horizontal demand curve, all align with the concept of perfect competition. Many firms produce similar products, leading to a situation where individual firms are price takers, and consumers have full knowledge of prices and quality, ensuring they can make informed decisions. The horizontal demand curve reflects that price is constant in a perfectly competitive market, as firms cannot influence the market price due to the large number of competitors offering identical products.