Definition: A perfectly competitive market is characterized by a large number of buyers (consumers) and suppliers (producers) as well as companies that sell homogenous products and services.
What Does Perfectly Competitive Market Mean?
What is the definition of perfectly competitive market? In a competitive market, the market mechanisms imply the relationship between suppliers and consumers, thereby determining the price of goods and services. More specifically, in a competitive market, there is a great number of suppliers and consumers, the products available to consumers are homogenous, and there are low barriers to entry.
As a result, producers and consumers are price takers, i.e. a single action of a producer or a consumer cannot influence the price of a good or a service. Therefore, producers and consumers consider the prices of goods and services as determined by the supply and demand for each product or service. Also, information about products and services is available to consumers.
Let’s look at an example.
Example
It is quite difficult to find accurate examples of industries that meet all the criteria of a competitive market, mostly because it is quite impossible for consumers to acquire all the available information (perfect information criterion) about a product or a service. However, a great example of an industry that almost meets all the criteria is the forex market.
In the forex market, the product (currency) is homogenous. The market forces determine the prices of the products. When many people sell a currency, its price depreciates against other currencies whose price appreciates. Traders have access to a great deal of information that may cause the price of a currency to depreciate or appreciate. Finally, a single purchase or a single sale of a currency does not change its trading value.
Extending the example of the forex market to the exchange market, one could argue that it is a perfect example of a competitive market. The only argument is that investors should but do not have all the information available. The theory holds that all new information is automatically reflected in the stock prices, yet no investor can beat the market.
Summary Definition
Define Perfectly Competitive Markets: Competitive market means there are a large number of suppliers and buyers operating independently, so choices and options are plentiful.
