Competition in a Free Market Economy

1. Competition in a Free Market Economy

2. What is Competition? • Competition is the struggle between buyers and sellers to get the best products at the lowest price • Competition between sellers keeps the cost of production low and the quality of goods higher than they would otherwise be • Buyers compete among themselves to find the best products at the lowest price

3. Types of Competition • Pure (Perfect) Competition • The market condition where there is a large number of sellers that offer very similar items • Characteristics: • Usually lots of small firms in market • Supply and demand set prices • Examples: • Most agricultural markets

4. Types of Competition • Monopolistic Competition • The market condition in which several suppliers offer a similar, yet differentiated, product (mixed between pure competition and true monopoly) • Characteristics: • Each independent firm makes decision about price and output, based on cost of production, product and market • Usually many firms that sell similar products, but are differentiated • Free entry and exit • Examples: • Hotel business • Restaurant business • Consumer Services (hairdressing)

5. Types of Competition • Oligopolies • The market condition in which very few suppliers offer very similar products or services • Characteristics: • Few sellers forces them to be aware of one another’s decisions. Often their decision change due to other firms influence. • Products can be homogeneous or differentiated • Usually price setters • Control most of market • Entry is difficult due to government regulations or patents