What Is Competition?

The market for ice cream, like most markets in the economy is highly competitive. Each buyer knows that there are several from which to choose, and each seller is aware that his product is similar to that offered by other sellers. As a result, the price of ice-cream and the quantity of ice cream sold are not determined by any single buyer or seller. Rather price and quantity are determined by all buyer and sellers as they interact in the marketplace.

Economists use the term competitive market to deceive a market in which there are so many buyers and so many sellers that each has a negligible impact on the market price. Each seller of ice cream has limited control over the price because other the sellers are offering similar products. A seller has little reason to charge less than the going price and if he charge more buyers will market their purchases elsewhere. Similarly no single buyer of ice cream can influence the price of ice cream because each buyer purchases only a small amount.

In this chapter we assume that markets are perfectly competitive. To reach this highest former of competition a market must have two characteristics: 1 the goods offered for sale are all exactly the same and (2) the buyers and sellers are so numerous that no single buyer of seller has any influence over the market price. Because buyers and sellers in perfectly competitive markets must assent the price the market determines they are said to be price takers. At the market price buyers can buy all they want and sellers can sell all they want.

There are some markets in which the assumption of perfect competition applies perfectly. In the wheat market for example there are thousands of farmers who sell wheat and millions of consumers who use wheat and wheat products. Because no single buyer or seller can influence the price of wheat each takes the price as given.

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