Types of Market Competition in the Economy

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The market is known as a group of buyers and sellers of a particular goods or service. Everyone interacts with each other in a market in daily life. Market competition is defined as a market in which there are many buyers and many sellers so that each has a negligible impact on the market price. In general, markets competition can be classified into four types which are perfect competition, monopoly, monopolistic competition and oligopoly(refer to Figure 1 in appendix 1). The first type of competition market is perfect competition. Perfect competition has three characteristics. Firstly, it must have “many buyers and sellers in the market, firms that can freely enter or exit the market and each firm selling an identical product therefore each buyer and seller are price takers” (Mankiw, 2012, p. 280). For example, in the egg market, there have many sellers and buyers, therefore the sellers have no market power to influence the selling price and therefore need to follow the market price. Moreover, the firm’s decision in perfect competition markets can be classified into short-run decisions and long-run decisions. Short-run is defined as a period of time in which each firm has a given plant size and the number of firms in the industry is fixed; while long-run is defined as a period of time in which the quantities of all inputs can be varied. In the short-run’s, firm can decide if they want to continue producing or to shut down the industry, and the quantity to produce if they decide to produce. In the long-run, firms can choose to enter or exit the industry, giving an increase or decrease in its plant size. The advantage of a perfect competition market is that the industry is easy to enter or exit, and that the consumers can buy an identical product for a fair market price; while the disadvantage is that the sellers cannot increase the selling price as they wish.
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