Competitive Markets (Cambridge (CIE) O Level Economics)

An Introduction To Competitive and Monopoly Markets

• Each firm operates in a specific market

• The conditions in different markets can vary significantly and are determined by the market structure in which the firm operates

• There are a range of market structures, however your syllabus only requires you to know the characteristics of two - competitive markets and monopolies

• Competitive markets are those with an extremely high degree of competition

• A monopoly is a market structure in which one firm dominates the market and has significant market power

• The answers to the questions above determine the type of market structure in which a firm is operating in

  • If a firm is selling a unique product (e.g. handmade car) it is likely operating in a monopoly market and setting high prices

Characteristics of Competitive Markets

• The characteristics of a competitive market are as follows

1. There are many buyers and sellers: due to the number of market participants sellers are price takers

2. There are no barriers to entry and exit from the industry: firms can start-up or leave the industry with relative ease which increases the level of competition

3. Buyers and sellers possess perfect knowledge of prices: this assumption presupposes perfect information e.g. if one seller lowers their price then all buyers will know about it

4. The products are homogenous: this means firms are unable to build brand loyalty as perfect substitutes exist and any price changes will result in losing customers
   

Advantages and Disadvantages of Competitive Markets