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Question

Difficulty: MediumPerfect Competition: Characteristics and Assumptions

In an agricultural sector exhibiting perfect competition, farmers can effortlessly reallocate land, labor, and capital from growing cassava to cultivated maize whenever the market price of maize rises, without facing financial penalties or geographic barriers. Which underlying assumption of a perfectly competitive market does this scenario illustrate?

  1. Perfect mobility of factors of productionAnswer
  2. B
    Homogeneity of agricultural products
  3. C
    Price-taking behavior of individual farmers
  4. D
    Localization of agricultural industries

Answer

Perfect mobility of factors of production
The correct answer is 'Perfect mobility of factors of production'. Perfect competition assumes that resources such as labor, land, and capital can freely move between industries and alternative uses without incurring transport costs, retraining hurdles, or artificial legal restrictions. When farmers switch inputs effortlessly from cassava to maize, they demonstrate this assumption in action.

Step-by-Step Solution

1
Analyze the market scenario described in the prompt
The scenario highlights inputs (land, labor, capital) shifting instantly and seamlessly from cassava production to maize production in response to price signals.
Identifying the central action in the scenario isolates whether the question addresses product characteristics, buyer/seller numbers, or factor movements.
2
Match the identified characteristic to the relevant economic assumption
Unrestricted, zero-cost movement of productive inputs across uses defines the assumption of perfect mobility of factors of production.
Under perfect competition, factors of production are fully mobile so that long-run adjustments occur seamlessly when relative profitability changes.

Key Concept

Perfect Mobility of Factors of Production
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Topics

Perfect Competition: Characteristics and Assumptions

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