Pretty weather outside today. Very sunny.Back to markets.
Markets classified by competition fall into two general categories
- Perfectly competitive markets
- Imperfectly competitive markets
Perfectly competitive markets can be further subdivided into other categories, but all perfectly competitive markets have some features in common. Sometimes referred to as pure competition. To be perfectly competitive, a market must have:
- Large number of buyers and sellers. A large number is defined in this case as being so many that no individual buyer or seller’s behavior can measurably affect demand or supply.
- Products are homogeneous. That is, the products produced by different producers are all identical. Consumers cannot distinguish between products.
- Free entry and exit. This means that anyone can begin producing the product without restriction and any producer can cease production at any time without restriction. Likewise, consumers can begin or end consumption without restriction.
- Perfect knowledge of the market. All members of the market know the costs, prices, and availability of the goods.
In a perfect market, the only way to distinguish products is by price. Given perfect knowledge, only the lowest priced product will sell at all. Anything priced above the lowest priced source of the product will not sell, which means that all producers will lower their prices to the minimum at which theycan stay in business. There will be no advertising, or only institutional advertising.
In a purely competitive market, a firm is a price-taker, and the industry is the price maker.