What is a ‘Competitive Market’?

What is a ‘Competitive Market’?

  • In the previous chapter, the market economy was one of the three main types of economic system
  • The market economy tries to resolve the economic problem via demand and supply, through the price mechanism
  • But how do markets work? And how does it allocate scarce resources in relation to our infinite wants


  • There are many examples of markets, but each has the same basic characteristics:
    • A willingness to trade or exchange goods and services. This is usually done using money, but bartering may be used in a developing country
    • A physical place where buyers and sellers can meet or contact each other.


  • Markets are also competitive
  • This is because they provide for the resolution of the basic economic problem, whereby scarce resources are allocated via the price system.
  • In every market where money is used, the products that are bought and sold command a price
  • This reflects what suppliers wish to sell their product for and what consumers are willing to pay to consume it.
  • The interaction of buyers and sellers determines the price of a product in any market situation.


  • The fact that markets are competitive means that prices fluctuate
  • So if more producers put more of their products on the market, the most likely result is that prices will fall.
  • The same thing will happen if buyers hold back from purchasing a product
  • In contrast, if producers restrict what they are willing to sell, then prices will increase, as well as a sudden surge in demand from consumers


  • Markets may be relatively complex to describe
  • Big markets can be split up into sub markets, and those submarkets split up further
  • The same general principles for the operation of markets apply in all cases.