Review Continuation : The Market System
Market is a mechanism by which buyers and sellers of commodity interact to determine its price and quantity.
Prices represent the terms on which people and firms voluntarily exchange different commodities. They serve as signals to producers and consumers. They also coordinate the decisions of producers and consumers in a market. This serves as the balance wheel in the market.
Types of Market
Market structure may be classified into the following categories
PERFECT TYPE
- Pure/Perfect Competition
In economic theory, perfect competition describes markets such that no participants are large enough to have the market power to set the price of a homogeneous product. Because the conditions for the perfect competion are strict, there are few if any perfectly competitive markets.
Perfect/Pure Competition is a market situation where there is a large number of independent buyers and sellers that no individual or group can significantly influence the price of what is being bought and sold.
Generally, a perfectly competitive market exist when every participant is a price-taker, and no participant influences the price of the product it buys or sells. The following are its important characteristics.
Characteristics
- Infinite buyers and sellers
- Zero entry and exit barriers
- Perfect factor utility
- Perfect information
- Zero transaction costs
- Profit Maximization
- Homogeneous products
- Constant returns to scale
This further implies that any buyer can go to any of the sellers and obtain the product which is no different from that sold by the other sellers. In such market situation, the commodity-price is set objectively by competition, at which price is assumed that the seller can dispose of all what he has in the market, because he is only infinitesimal minority.
Obviously, pure competition is too perfect a market to be at all realistic. Nevertheless, it is a useful model for analysis of market behavior, particularly if one deals in the market for agricultural crops or for securities in financial world.
