Competitive Markets (CIE IGCSE Economics)

• Each firm operates in a specific market
• The conditions in different markets can vary significantly & are determined by the market structure in which the firm operates
• There are a range of market structures, however your syllabus only requires you to know the characteristics of two - competitive markets & monopolies
• Competitive markets are those with an extremely high degree of competition
• A monopoly is a market structure in which one firm dominates the market & has significant market power

 

The six characteristics which determine the type of market structure a firm operates in - competitive or monopoly

 

• The answers to the questions above determine the type of market structure in which a firm is operating in
  • If a firm is selling a unique product (e.g.hand made car) it is likely operating in a monopoly market & setting high prices

• The characteristics of a competitive market are as follows

1. There are many buyers and sellers: due to the number of market participants sellers are price takers
2. There are no barriers to entry & exit from the industry: firms can start-up or leave the industry with relative ease which increases the level of competition
3. Buyers & sellers possess perfect knowledge of prices: this assumption presupposes perfect information e.g if one seller lowers their price then all buyers will know about it
4. The products are homogenous: this means firms are unable to build brand loyalty as perfect substitutes exist & any price changes will result in losing customers
   
   

Advantages & Disadvantages of Competitive Markets

Advantages	Disadvantages
Lower prices: competition causes firms to lower prices for consumers in an attempt to gain market share Better quality: firms innovate & continuously seek to improve their quality of their goods/services in order to become recognised in a crowded market More choice: more sellers equals more choice for consumers	Worse quality: in a bid to lower prices, product quality may actually deteriorate over time Too much choice: consumers may be overwhelmed & not explore the full range of market offerings, instead sticking to what they know Worker welfare: the greater the competition the greater the need to cut costs, often resulting in low wages & poor working environments