Question

For a market to be competitive, why is it important that there be buyers and sellers and easy entry and exit?

Answer 1

Large number of sellers will not allow a single seller to command over the market by charging high price and competition among the sellers will drive down the price to the competitive level. Large number if buyers also allow the price to not rise above the competitive level as when one seller charges higher price all the customers will shift to other firms, thereby causing loss for the firm that charges higher price. Easy entry and exit of the firms also helps in keeping the price at the competitive level. When there are excess profits new firms will enter into the market and the supply curve will shift rightwards. This will cause price to fall back to the level where every firm earns normal profit. Similarly when price falls below the competitive level and there are losses, firm exit the industry and the supply curve shifts backwards. This causes price to rise and in equilibrium all firms just earn normal profit.