Economics, 3rd Edition

competitive market

 is a market in which there are many buyers and many sellers so that each has a 

negligible impact on the market price. Each seller has limited control over the price because other sellers 

are offering similar products and each seller only supplies a very small amount in relation to the total 

supply of the market. In a perfectly competitive market the products are identical (homogenous) so a seller 

has little reason to charge less than the going price, and if he or she charges more, buyers will make their 

purchases elsewhere. Similarly, no single buyer can influence the price because each buyer purchases 

only a small amount relative to the size of the market.

In this chapter, we will look at the model for supply and demand assuming these characteristics; we 

examine how buyers and sellers interact in competitive markets. We see how the forces of supply and 

demand determine both the quantity of the good sold and its price. In later chapters we will look at what 

happens when some of these assumptions are relaxed. By doing this we can see how markets might 

work differently when there are a few sellers who dominate the market or when they are able to differen-

tiate their product in some way and so the assumption of homogeneity does not hold.