A competitive market is a very popular market structure. To be declared a competitive market, a market should have the following characteristics:
A competitive market consists of a huge number of sellers and buyers.
The sellers in such a type of market sell an identical product. Put simply, all the firms in a competitive market sell the same product.
In such a market, the prices and the supply of the products cannot be controlled by a single seller or a single buyer.
The buyers in such a market cannot prefer buying products from a particular seller as all the sellers sell identical products, and the buyers have the option to buy from any of the sellers.
Buyers and sellers of a competitive market should have perfect knowledge of the prices of products in the market, as this will help to prevent variations in the price of products or services in the market.
Factors of production, such as labor and capital, in a competitive market have the freedom to move freely in or out of the industry.
A new firm can enter the competitive market for free. An existing firm can also exit the competitive market for free.
A market to be competitive requires that both sellers and buyers stay in the same place as that will help to maintain a close relationship among them. This will also help them to cut their transportation costs, as the inclusion of transportation costs might increase the price of the products or services.
Advantages of a competitive market
The competitive market is beneficial for both the sellers and buyers in various ways. Some of the advantages are listed as follows:
This type of market structure helps to improve the business. Since there is a huge competition among the sellers, they tend to produce high-quality products and use the latest technologies to develop the quality of the products, which overall improves the business.
This type of market is very beneficial for the consumers as they are charge lower prices for the products and services.
This type of market is very responsive to the needs and wants of consumers.
The competitive market has a huge number of sellers selling the same products. This is very beneficial for consumers because it gives them plenty of options.
Huge competition in the competitive market encourages firms to make the most efficient use of their resources.
Disadvantages of a competitive market
There is a very popular saying in English: “every coin has two sides.†This means that everything has a positive and a negative side. The concept of a competitive market, as already discussed, has various advantages. However, this form of a market structure also has many disadvantages, listed as follows:
Huge competition in the market decreases the market share of the firms and reduces the customer base.
Huge competition among the sellers forces them to lower the price of the products, which decreases the amount of return or revenue earned from the sale of products.
An excess of the production of goods floods the market, which leads to the waste of products.
All the firms in the competitive market produce the same product. This leads to a scarcity of a variety of products.
Overproduction of products leads to the piling up of the products that tie up the capital of the firms, and the firms cannot earn enough profit for further investment.
