A Level Economics AQA Practice Exam

In a perfectly competitive market, what must be true about new firms?

1. They are required to join a cartel

2. They face significant barriers to entry

3. They can enter the market freely

4. They must have unique products

The correct answer is: They can enter the market freely

In a perfectly competitive market, one of the defining characteristics is the absence of barriers to entry and exit, which means that new firms can enter the market freely. This openness allows markets to adjust to changes in demand and supply, ensuring that resources are allocated efficiently. When existing firms are making profits, new firms are incentivized to enter, increasing competition and ultimately pushing prices down. The ability for new firms to enter easily fosters a competitive environment where no single firm has significant market power, as many firms supply identical products. This further reinforces the notion that in a perfectly competitive market, conditions are favorable for new firms to establish themselves without encountering obstacles. Such dynamics contribute to the long-run equilibrium where firms earn normal profits, highlighting the importance of free entry and exit for market efficiency.