Principles of Economics, 7th Edition

Published by South-Western College
ISBN 10: 128516587X
ISBN 13: 978-1-28516-587-5

Chapter 4 - Part II - The Market Forces of Supply and Demand - Questions for Review: 1

Answer

Competitive market: Such a market in which multiple producers or sellers compete with each other to sell the same or similar product to multiple buyers and tries to maximize their market share is a competitive market. In a competitive market, sellers have less power of fixing the price of a product. Sellers' power to set a price of a product in the market further reduces as the market becomes more competitive. Markets that are not perfectly competitive: * Markets are not perfectly competitive when there is a monopoly of a single seller. For example, if there is only one school in the city then it is called a monopolistic market where the school is the price setter. That is the school in this city has greater power to set the price. * Assume there is only one hotel in the city. In this case, again, the consumers will have less power to influence the price of the hotel as there are no other competitors.

Work Step by Step

Following observations will help the student in understanding the answer: * a perfectly competitive market has all the sellers selling homogeneous or identical products and they have no power to set the price * price in perfectly competitive market is governed by the market forces - supply & demand * in a perfect competition, each seller will have a small share of the market
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