The Morning Bazaar: a perfectly competitive market

 Bohai Li

A perfectly competitive market, AKA atomistic market, is an idealised market model in economics. There are several assumptions (characteristics) of a perfectly competitive market.

Number of firms in whole market

Every firm in a perfectly competitive market takes the market price as given, they cannot set the price themselves. In other words, the situation of monopoly is hard to happen. All participants in the perfectly competitive market, buyers and sellers, hold full information about products and prices. As a result, companies cannot gain profits through poor information, and no company can control the market.

How freely firms could enter market

The perfectly competitive market doesn’t have the barriers to entry and exit. Every firm could stay in or exit the market freely. When total revenue is lower than total cost, or the price is lower than average total cost, the firm couldn’t get enough profit from this market, they will choose to exit from the market, vice versa.


Nature of product

As mentioned before, all products are identical, so they are hard to let monopoly happen. Products are usually produced according to common market standards, such as rice, wheat and other basic agricultural products. The quality and attributes of these products are essentially the same.

In a perfectly competitive market, consumers' preferences for products are undifferentiated and usually only focus is on price, with no additional requirements for the brand or features of the product. For example, when consumers buy raw materials (such as iron ore, crude oil), they do not care which producer supplies them if they meet the corresponding specifications and quality. As a result, manufacturers do not need to add additional product differentiation, and all companies produce products that look the same. The benefits of product homogeneity are reduced costs and transportation expenses, and in this way remain competitive in the market.

Firm is a price taker not a price maker

Price in this market is determined by the relationship between supply and demand. All things firms can do is to decide own output based on the market price, rather than changing the price.



As shown in the above figure, firms take the equilibrium price as given and sell as many units of output as they can.

Example of perfectly competitive market

In my country, China, lots of areas have their own agricultural product markets. Although the quality and quantity of fruits and vegetables in big supermarkets are guaranteed, many people choose organic produce from nearby farmers. With the development of the economy, the existence of such a market is not just for livelihood, but also for a healthier life.

For example, in the vegetable wholesale markets spontaneously organised by farmers in some areas, most of the products are grown by local farmers themselves. The market here is a good model of a perfectly competitive market because the products are homogeneous (fruits and vegetables, grains, corn). Farmers are price takers because they cannot and do not have to set their own prices.



(Morning market in China)

There are many kinds of vegetables and fruits, but the technology used, and the quality of the products are close, so there is no huge price difference and product information gap. These are the characteristics of a perfectly competitive market.


About the author
Bohai Li is a second year Accounting and Finance student. 
You can contact Bohai b.li@stu22.qmul.ac.uk


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