THE MEANING OF COMPETITION

A competitive market, sometimes called a perfectly competitive market has two characteristics:
• There are many buyers and many sellers in the market.
• The goods offered by the various sellers are largely the same.

As an example, consider the market for milk, No single consumer of milk can influence the price of milk because each buyer purchases a small amount relative to the size of the market. Similarly, each dairy farmer has limited control over the price because many other sellers are offering milk that is essentially identical. Because each seller can sell all he wants at the going price, he has little reason to charge less,and if he charges more, buyers will go elsewhere. Buyers and’ sellers i n competitive markets must accept the price the market determines and, therefore, are said to be price taker.

• Firms can freely enter or exit the market.

If, for instance, anyone can decide to start a dair farm, and if any existing dairy farmer can decider leave the dairy business, then the dairy industry would satisfy this condition. It should be noted that much of the analysis of competitive firms does .not rely on the assumption of free entry and exit because this condition is not necessary for firms to be price takers. As we will see later in this chapter, however, entry and exit are often powerful forces that shape· the long-run outcome in competitive markets.

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