Which of the following best describes the role of competitive pressures in a perfectly competitive market?

• A. They encourage firms to restrict output to increase profits.
• B. They eliminate the need for firms to respond to consumer preferences.
• C. They allow firms to set prices above the market equilibrium.
• D. They force firms to produce at the lowest possible cost and sell at the market price.

Answer: (D)

Verified step by step guidance

1. Step 1: Understand the nature of a perfectly competitive market, where many firms sell identical products, and no single firm can influence the market price.
2. Step 2: Recognize that in such markets, firms are price takers, meaning they must accept the market price determined by overall supply and demand.
3. Step 3: Analyze how competitive pressures prevent firms from setting prices above the market equilibrium because consumers would buy from competitors offering lower prices.
4. Step 4: Consider that firms are incentivized to minimize costs to remain profitable since they cannot control prices and must sell at the market price.
5. Step 5: Conclude that competitive pressures lead firms to produce efficiently (at the lowest possible cost) and sell at the market price, ensuring no excess profits in the long run.