Question

What is and is not a competitive market? Like, what are some good examples of a competitive market?

Answer 1

A competitive market is a market structure in which there are a large number of producers (firms) producing a homogeneous product so that no individual firm can influence the price of the commodity. In this type of market , price is determined in the industry ,ie, by all the firms taken together, through the forces of market demand and supply. An individual firm takes the price as given and it takes decision about the amount of output to be sold at that price. This makes the firm under perfect competition a price taker rather than price maker.A competitive market is a market structure in which there are a large number of producers (firms) producing a homogeneous product so that no individual firm can influence the price of the commodity. Thus in competitive markets there are many competing producers (firms) who producing almost same type of commodities to provide to the consumers. In this type of market , price is determined in the industry ,ie, by all the firms taken together, through the forces of market demand and supply. An individual firm takes the price as given and it takes decision about the amount of output to be sold at that price. This makes the firm under perfect competition a price taker rather than price maker. This type of markets possess five main characters : rivalry , profit , excludability , diminishability and rejectability. There are few certain features of competitive markets too , they are :
a) Large number of buyers and sellers - there are large number of buyers and sellers of the commodity under perfect competition , each too small to exert any influence on the price of the commodity by his or her actions. In this market structure a competitive firm has no market power to influence price.

b) Homogenous Product - All firms under competitive market produces Homogenous or indentical products. The product of one firm is perfect substitute of the other firms.
c) Freedom of entry and exit - This means that new firms are free to enter the industry and start producing if they wish so , and the existing firms are free to cease production and leave the industry if they desire so. There are no restrictions - legal , natural or man-made on the entry of new firm into and the exit of the old firms from the industry.
d) Perfect mobility of resources - This character ensures that the resources or the factors of production can enter it quit a firm or industry at will. This character implies that resources are able to switch over from one use to another without any restrictions.

e) Perfect knowledge - Consumers , firms and resource owners under competitive market have perfect knowledge about the market conditions. Each firm knows the price prevailing in the market and it would not sell the commodity at a price below the market price. Similarly the consumer also have perfect knowledge about the market and it's prevailing prices and won't buy a good above this prevailing price.

f) Absense of transport cost - another feature of competitive market is that the buyers and sellers incur no transport costs in purchasing and selling the goods. This assumption is necessary to maintain uniform price throughout the market otherwise prices for identical goods would differ if transport costs are added to its price.
Some examples of competitive market :

Agricultural commodities such as wheat are taken as goods example of competitive markets. This is so because there are many producers (farmer) of wheat in this market . No individual producer (farmer) in this market can affect the market price by increasing or decreasing his production of wheat .Due to this , every producer (farmer) in this market has to take up the market price as predetermined.
Foreign Exchange markets can also be considered as an competitive market because here traders have access to many buyers and sellers and moreover here currency is all homogeneous. In this market there is also perfect knowledge about relative prices , etc. So it can be considered as an example of competitive market.

When the markets are not competitive , they are known as non competitive markets or imperfect competition markets. Even , if one condition of perfect competition or competitive market doesn't meet , imperfect competition occurs. In non competitive markets usually the buyers and sellers of the market have the power to influence the market price of the commodity directly or indirectly . Monopoly , oligopoly are good examples of non competitive markets . Public utilities like gas , electric, water , etc are pure monopolies and thus are examples of non competitive markets. Auto industry , commercial air travel , etc are examples of oligopoly and thus are also examples of non competitive markets.