Formal Assumption of the Competitive Model

When economists speak of a competitive market, they have in mind a market with four characteristics:

• There are many small buyers and sellers.

We are usually as vague as our student will let us be about what small means. What is important is that no single buyers or sellers should be large enough to influence the market price.

• The product is standardized.

Physically identical goods sold in the same place but at different from are different product time an economic point of view. The same is true of physically identical goods sold in different places at the same time. The assumption that an industry’s product is completely standardized is thus unlikely to be satisfied, in strictest sense, in any real-world market. Often the assumption of standardization of standardization is an acceptable approximation. Often it is not. When we study oligopoly in Chapters 5 and 6, we will deal with both cases.

• There is free and easy entry and exit.

In a competitive market, at least in the long run, producers must be able to start up or shut down operation of they find it in their interest to do so. If a firm wants to set up shop, it must be able to do so at the same cost as that of firms already in the market.

• There is complete and perfect knowledge.

All firms know the available technology. Buyers and sellers know the market price.