What are the characteristics of a perfectly competitive market?
A perfectly competitive market has four defining characteristics. First, there exists a large number of buyers and sellers in the market. This means each individual buyer and seller is very small compared to the size of the market, and no individual buyer or seller can influence the market by their size.
Second, each firm produces and sells a homogenous product. This means the product of one firm cannot be differentiated from the product of any other firm. The product of each firm is identical, so a buyer can choose to buy from any firm and get the same product.
Third, there is free entry and exit for firms in the market. This means it is easy for firms to enter the market as well as to leave it. Fourth, information is perfect. These features result in the single most distinguishing characteristic of perfect competition: price-taking behaviour.
Explanation
The textbook explicitly lists four defining features of a perfectly competitive market in Section 4.1. Students should mention all four characteristics: large number of buyers and sellers, homogenous products, free entry and exit, and perfect information. The context also explains the implication of each feature. Additionally, the text highlights that these features lead to price-taking behaviour, which is the most distinguishing characteristic. For a 3-mark question, students must list all four features with brief explanations.