Question

State the four basic conditions that characterize a competitive market.

Answer 1

Four basic conditions that characterize a competitive market (Perfect Competition) are:

1. Having many buyers and sellers: There are many participants on the buyer and selling sides. The product is sold by many sellers and there are also many buyers who offer to buy the product. In ideal situation any body and everybody is able to buy or sell in a perfect competitive market.

2. Identical Products: There is no difference in the products sold by different suppliers. Many producers produce same product sold in the market and they do not have an advantage over one another in terms of features and type (identical products).

3. Informed buyers and sellers: The market provides the buyer full information about the product and the price. The buyer is well aware about the price and the product features and the alternative present in terms of choosing suppliers.

4. Free market entry and exit: Firms can enter the market when they can make money and exit (leave) the market when they can't. This criteria states that any seller desirious to sell the product may enter the market and sell the product without any discrimination or lobbying effect. Also no trade union or regulatory barriers exists for any player to enter the market which otherwise may affect the prices and supply volumes.

These were the four basic conditions that any competitive market satisfies.