QS Study

Generally, market means a place where buyers and sellers buy and sell their product. But in economics, the market has a separate meaning. In economics, the market indicates a significant group of buyers and sellers get together in order to exchange their goods and services.

In the words of Prof- “A market may be defined as an area over which buyers and sellers negotiate the exchange of a well-defined commodity.”

A market has several important characteristics:

  1. Presence of significant buyers and sellers
  2. Presence of particular product and services
  3. Particular price for the market
  4. Particular place where the transaction can take place between buyer and seller.

Finally, a market is the buyers and sellers of a commodity interact to determine its price and quantity.

Perfectly Competitive Market

A market is said to be [perfect competitive market where a sharp competition exists between a large number of buyers and sellers for a homogeneous product at only one price in all over the market. There are several characteristics of a perfectly competitive market, those are:

  1. A large number buyers and sellers: A large number of consumers with the willingness and ability to buy the product at a certain price, and a large number of producers with the willingness and ability to supply the product at a certain
  2. No barriers of entry and exit: No entry and exit barriers makes it extremely easy to enter or exit a perfectly competitive market.
  3. Perfect factor mobility: In the long run factors of production are perfectly mobile, allowing free long-term adjustments to change market
  4. Perfect information: All consumers and producers are assumed to have perfect knowledge of price, utility, and quality and production methods of products.
  5. Zero transaction costs: Buyers and sellers do not incur costs in making an exchange of goods in a perfectly competitive market.
  6. Profit maximization: Firms are assumed to sell where marginal costs meet marginal revenue, where the most profit is generated.
  7. Homogeneous products: The products are perfect substitutes for each other; i.e. the qualities and characteristics of a market good or service do not vary between different suppliers.
  8. Homogeneous products: The products are perfect substitutes for each other; i.e. the qualities and characteristics of a market good or service do not vary between different suppliers.
  9. Non-increasing returns to scale: The lack of increasing returns to scale (or economies of scale) ensures that there will always be a sufficient number of firms in the industry.
  10. Property rights: Well defined property rights determine what may be sold, as well as what rights are conferred on the buyer.
  11. Rational buyers: buyers capable of making rational purchases based on information was given
  12. No externalizes: costs or benefits of an activity do not affect third parties

In the short run, perfectly competitive markets are not productively efficient as output will not occur where marginal cost is equal to average cost (MC=AC).

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