What is a ‘Competitive Market’?

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    What is a ‘Competitive Market’?

    • In the previous chapter, the market economy was one of the three main types of economic system
    • The market economy tries to resolve the economic problem via demand and supply, through the price mechanism
    • But how do markets work? And how does it allocate scarce resources in relation to our infinite wants

     

    • There are many examples of markets, but each has the same basic characteristics:
      • A willingness to trade or exchange goods and services. This is usually done using money, but bartering may be used in a developing country
      • A physical place where buyers and sellers can meet or contact each other.

     

    • Markets are also competitive
    • This is because they provide for the resolution of the basic economic problem, whereby scarce resources are allocated via the price system.
    • In every market where money is used, the products that are bought and sold command a price
    • This reflects what suppliers wish to sell their product for and what consumers are willing to pay to consume it.
    • The interaction of buyers and sellers determines the price of a product in any market situation.

     

    • The fact that markets are competitive means that prices fluctuate
    • So if more producers put more of their products on the market, the most likely result is that prices will fall.
    • The same thing will happen if buyers hold back from purchasing a product
    • In contrast, if producers restrict what they are willing to sell, then prices will increase, as well as a sudden surge in demand from consumers

     

    • Markets may be relatively complex to describe
    • Big markets can be split up into sub markets, and those submarkets split up further
    • The same general principles for the operation of markets apply in all cases.

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