What Is Competition

The market for ice cream, like most markets in the economy, is highly competitive. Each buyer knows that there -ire several sellers from which to choose, and each seller is aware that his or her product is similar to that offered by other sellers. As a result, the price of ice cream and the quantity of ke cream sold are not determined by any single buyer or seller. Rather, price and quantity are determined by .ill buyers and sellers as the)' interact in the marketplace.

Economists U9e the term competitive market to describe a market in which there are so many buyers and so many sellers that each has a negligible impact on the market price- Each seller of ice cream has limited control over the price because other sellers are offering similar products. A seller has little reason to charge less than the going price, and if he or she charges more, buyers will make their purchases elsewhere. Similarly, no single buyer of ice cream can influence the price of ice cream bccause each buyer purchases only a small amount.

In this chapter, we assume that markets are perfectly competitive. To reach this highest form of competition, a market must have two characteristics: (1) the goods offered for sale are all exactly the same, and f2) the buyer» and sellers are SO numerous that no single buyer or seller has any influence over the market price. Because buyers and sellers in perfectly competitive markets must accept the prke the market determines, they are said to be price lakers. At the market prke, buyers can buy all they want, and sellers can sell all they want.

There are some markets in which the assumption of perfect competition applies perfectly. In the wheal market, for example, there are thousands of farmers who sell wheat and millions of consumers who use wheat and wheat products. Because no single buyer or seller can influence the price of wheat, each takes the price as given.

Not all goods and services, however, are sold in perfectly competitive markets. Some markets have only one seller, and this seller sets the price. Such a seller is called a monopoly. Your local cable television company, for instance, may be a monopoly. Residents of your town probably have only one cable company from which to buy this service. Still other markets fall between the extremes of perfect competition and monopoly.

Despite the diversity of market types we find in the world, assuming perfect competition is a useful simplification and, therefore, a natural place to start. Perfectly competitive markets arc the easiest to analyze because everyone participating in the market takes the price asgiven by market conditions Moreover, because some degree of competition is present in most markets, many of the lessons that we learn by studying supply and demand under perfect competition apply in more complicated markets as well.

QUICK QUIZ What is a market? • What are the characteristics of a perfect:y competitive market?

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