Competitive Market

Updated Dec 31, 2022

Definition of a Competitive Market

A competitive market is defined as a market in which there are many buyers and sellers, and none of them have the power to influence prices. That means the market is characterized by perfect competition, where all participants are price takers and have no control over the market price.

Example

To illustrate this, let’s look at the market for apples. In a competitive market, there are many buyers and sellers of apples. For the sake of this example, we’ll assume that none of them have the power to influence the price of apples, as the market price is determined by the forces of supply and demand. As a result, all participants are price takers and have to accept the market price.

Similarly, think about the market for breakfast cereals. In a competitive market, there are many cereal producers, and none of them have the power to influence the price. As a result, all participants are, again, price takers and have to accept the market price they can get for selling their cereal.

Why Competitive Markets Matter

Competitive markets are essential for a healthy economy. They ensure that prices are determined by the forces of supply and demand, and not by any single participant. This, in turn, ensures that prices are fair and that resources are allocated efficiently.

Furthermore, competitive markets also ensure that there is no discrimination against any participant. That means all participants have the same access to the market and the same opportunities to make profits. As a result, competitive markets are essential for a fair and efficient economy.