Tag Archives: free entry

Characteristics of Pure Competition Market System

10 Jul

Pure competition

  Very large number of producers An important feature of this type of market system is the presence of big number of sellers that act independently and offer their products to large national and international markets. Example: the stock market, the exchange market.

  • Standardized product Pure competitive firms produce a standardized product. Since price is the same demanders won’t care which product to buy. All goods are substitutes of each other.  They make no attempt to differentiate their products and there is not any non-price competition, because their goods are homogeneous.
  • Price-Takers In pure competitive markets firms don’t try to control the price, because each firm is producing only a small amount of the total product, so increasing or decreasing their output won’t affect the price. We may say that firms and pure-competitive markets are price-takers: they can’t change the market price, they only adjust to it. Selling their goods on a higher price will results in loss of revenue, because 1000 sellers will offer their goods for a smaller price so the consumers, since the goods are identical, will buy less costly one, because in this way they get more marginal benefit. There isn’t any reason to decrease the price, because sellers want to get higher revenues if it is possible. By decreasing price they may lose higher profits. So the price of the sellers will be the same, since their goods are identical.
  • Free entry and free exit  New firms can freely enter and the existing ones may exit the pure competitive industry. No legal, financial, technological or other obstacles prohibit suppliers to sell their goods in any pure-competitive market.

Even if pure competition is relatively rare in our real world, it is meaningful starting point for any discussion about price and output determination. It provides a standard for evaluating the efficiency of real world economy. Even if this kind of market system is extremely rare some industry may be a close approximation of it: market for agricultural goods, foreign exchange, and stock share market. So by means of them we can learn more about this model of market system.

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