In perfectly competitive markets, why must firms always deal in commodities?

• A. Because government regulations require all firms to sell the same product.
• B. Because commodities are always more profitable than differentiated goods.
• C. Because consumers prefer commodities over branded products in all markets.
• D. Because commodities are standardized and identical, ensuring no firm can differentiate its product and all firms are price takers.

Answer: (D)

Verified step by step guidance

1. Understand the definition of a commodity in the context of perfectly competitive markets: a commodity is a product that is standardized and identical across all sellers, meaning consumers see no difference between products from different firms.
2. Recognize that in perfectly competitive markets, firms are price takers, which means they have no power to influence the market price because the products are indistinguishable and buyers can easily switch between sellers.
3. Analyze why product differentiation is not possible in such markets: since all products are identical, no firm can charge a higher price or create brand loyalty, which eliminates the possibility of non-price competition.
4. Consider the role of government regulations and consumer preferences: while these factors can influence markets, the defining characteristic of perfect competition is the nature of the product itself, not external rules or preferences.
5. Conclude that firms must deal in commodities in perfectly competitive markets because the standardization and identical nature of the product ensure that no firm can differentiate its product, making all firms price takers.