- Competition
among sellers lowers costs and prices, and encourages producers to
produce more of what consumers are willing and able to buy. Competition
among buyers increases prices and allocates goods and services to
those who are willing and able to pay the most for them. Competition
improves productivity by forcing all suppliers to be "the best
that they can be." Productivity improvements, in turn, foster
economic growth, and a better quality of life for current and future
generations.
- Pure
Competition is an abstract model, one which has few (if any) examples
in the real world. Economists use it as a standard for judging the
level of efficiency in real markets. The closer its resemblance to
pure competition, the more efficient the market is said to be.
- A
Purely or Perfectly competitive market exists when there are (a)many
buyers and many sellers (as many as it takes for each to be a small
fraction of the total market and thus unable to influence any outcome);
(b) selling a homogeneous or identical product and (c) there are no
barriers to entry or exit. The level of competition in a market or
industry is affected by the ease with which new producers can enter
the industry and by consumers' information about the availability,
price and quantity of substitute goods and services.
- The
pursuit of self-interest in competitive markets generally leads to
choices and behavior that also promote the national level of economic
well being, as if buyers and sellers were guided by an "Invisible
Hand" (to use Adam
Smith's term.)
- Collusion
among buyers or sellers reduces the level of competition in a market.
Collusion is more difficult in markets with large numbers of buyers
and sellers. Thus, the more competitive the market, the less chances
of collusion.
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