Chapter 3, Problem 1QFR

To determine

The working of a competitive market and its reliability on the existence of many buyers and sellers

Explanation of Solution

In perfect competition market, neither a single producer nor a single consumer can determine the operation of this market. It offers efficiency in both allocation and production.

The market depends on the existence of many buyers and sellers because of the following reasons:

1. There are so many customers that one customer can purchase a very small portion of the market supply, likewise a single seller can provide a very small fraction of the total output too. Hence in relation to the sector it belongs, the size of the competitive firm is very small.
2. All suppliers provide a homogenous product in a perfect competition market, in simple words all the competitive firm's products are the same.
3. Since many sellers sell more or less the same product or service, sometimes a single business is an irrelevant part of the market. It has no control over both the supply and price of the market.
4. Buyers, as well as sellers, have complete knowledge of the current market price. That is why in a perfect competition market there can only be one price.
5. A new business can freely enter into this particular type of market or an existing business can freely leave the industry in the longer term.

Hence, a competitive market depends on the presence of many consumers and producers as there are huge amount of buyers and sellers for a single product or service. The products of the competitive market are homogenous or identical.

Economics Concept Introduction

Introduction:

A perfect competition market is one where a huge number of sellers compete with each other to fulfill the demands and requirements of a huge number of consumers. The brief idea of perfect competition market is given in the following diagram:

  

Figure - A