Economics

Every market is characterized by the presence of buyers and sellers and they are the ones who determine the type of market structure and its conditions. A competitive market is a type of market which is directly opposite to a monopoly kind of market. In a market, there is demand for goods and services by buyers and on the other hand, there is supply of goods and services by the sellers. Buyers are always willing to buy more products according to their financial ability besides maximizing the satisfaction they derive after consuming the products. On the other hand, sellers make provisions of more products in a market so as to meet the insatiable quantity demanded by the buyers. Nevertheless, a decline in amount of available products in the market leads to higher prices thus influencing the buyers to look for substitute goods. To counteract such a move, sellers reduce product prices to suit the buyers demand and hence the buyers are said to influence the market price. This is one of the major characteristic in competitive markets whereby buyers and sellers are directly involved in influencing the prevailing market price. In other words, a competitive market may be termed as a free market because of the presence of many buyers and sellers who buys and sells wide variety of products. Another characteristic of a competitive market is that a significant proportion of the sellers are small firms whose capacity to produce goods and services is insufficient hence they are incapable of sustaining the required market supply quantity demanded (Riley 2006)

Consequently, any individual seller or producer in a competitive market has got no control of determining the product price and heshe is forced by market conditions determined by buyers- to take the current price. This is referred to as the price-taking behavior. Reason being presence of many competing firms in the market forces each seller to charge current market price for his goods to make sales. Secondly, there are no restrictionsbarriers for sellers and buyers to enter into and exit out of the market. Everyone is free to venture into a competitive market. Thirdly, products offered in a perfectly competitive market are homogenous in nature. Therefore they are perfect substitutes of each other. In cases where one seller hikes hisher product price, the buyer has an alternative to buy from another seller and that is why sellers are referred to as price-takers. Fourth, in a competitive market, the buyers and sellers have sufficient knowledge concerning prevailing market conditions. This means they have no doubts of current product prices and type of goods on offer and they incur no costs to obtain such information. Fifth, in a competitive market, sellers aim at taking advantage of every opportunity to maximize profits. Sixth, another assumption made by economists is that buyers are solely motivated by the desire to maximize satisfaction they gain as a result of consuming products. Seventh, it is also assumed that there are no externalities arising from production andor consumption which lie outside the market as stated by Riley (2006).

In a competitive market, the demand for goods and services by buyers and their supply by the sellers determines the markets equilibrium quantity and price. In other words, equilibrium is reached at after the buyers specify how much they are willing to buy from the sellers at a certain price. At the same time, the sellers specify how much quantity of goods and services they are willing to offer for sale in the market.

Demand curves in a competitive market
 
Demand curves in a competitive market (Pirayoff 2010).
 
In the above, the first figure (a) illustrates the demand and supply curves of various firms operating in a competitive market whereas the second one (b) outlines the demand curve of an individual firm in operating in a competitive market. As earlier mentioned, a competitive market has many sellers firms and that is why a single firm has no influence in determining the market price. A firms demand curve is horizontally oriented indicating a perfectly elastic demand. This means that a slight change in price of goods and services, is directly proportional to the change in quantity demanded and therefore the sellers are the price takers -they take the price as given. In addition, the quantity of output an individual firm supplies to the market determines its equilibrium quantity of output and regardless of quantity supplied it cannot influence the market price (Pirayoff 2010, pp. 40-60).

On the other hand, demand curve for firms (market) slopes downwards and is a combination of all the individual demand curves of various single sellersfirms operating in a competitive market. The fact that each firm has insignificant influence on the market price explains the difference in gradients of the two curves. In a competitive market, the market equilibrium determined differently in the short and long run periods. In the short-run-period, equilibrium is driven by forces of demand and supply and it is achieved when Marginal Cost is equal to the Marginal Revenue. This point is referred to as profit maximizing point.

Short-run equilibrium (Robert 2002)
In the above figure, the shaded part represents supernormal profits which act as an attraction of new firms into the market. As a result, the prevailing equilibrium price and quantity changes due to an outward shift in supply. This marks the long-term period and subsequently the quantity of goods and services supplied to the market increases thus reducing equilibrium price. Firms face a falling perfectly elastic demand curve as shown below.

Long-run equilibrium (Robert 2002)
At such a time, the market price is proportionate to the average costs whereas the demand curve is a tangent to the average cost curve at the minimum point. Hence, all the firms in a competitive market enjoy normal profits and there is usually no further entry into andor exit out of the industry. Besides, in the long-run-period there is absence of restrictionsbarriers and sellersfirms vary their level and type of inputs so as to minimize costs of production and increase earnings (Robert 2002, pp. 22-39).

Normal profit making point in a competitive market (Robert 2002).
Political governments influences product price through various methods which include but not limited to tax imposition, price ceilings, price caps, and production quotas among others (Robert 2002, p 40). Price controls are of two kinds price ceilings and price floors. First, price ceilings are usually set below the equilibrium price and leads to a reduction (artificial shortage) in quantity supplied by the sellers into the market. This is also referred to as deadweight loss the amount of quantity demanded by suppliers exceeds the amount of quantity supplied by the sellersfirms. On the other hand, the amount of quantity demanded increase significantly because of the price cap.

Price ceilings (The analysis of competitive markets 2010).
Second, the price floors are also set by the government above the prevailing equilibrium price. As a result, more sellersfirms ventures into the market to take advantage and make supernormal profits which renders the market to be characterized by excess supply of goods and services according to Robert (2002, pp. 30-55).

Price floors (The analysis of competitive markets 2010).
Another measure applied by the government is imposition of tax. Tax increases the price of goods and services that buyers are willing to pay for. Besides, there is no increase in consumer and producer surpluses as the government collects it in form of revenue. Subsequently, the overall trade in the market is reduced and is characterized by excess burden decreased consumer and producer surplus. In cases where the demand is highly inelastic, the costs of tax falls on the buyers but if it is comparatively elastic with respect to market supply, the sellers incur the tax burden as illustrated below (The analysis of competitive markets 2010).

Tax imposition (The analysis of competitive markets 2010).
Such government policies results in major implication on the market performance and it is important to note that the main objective of such policies is to protect consumers against exploitation by sellers. In case of price controls price floor and ceiling- the sellers no longer enjoy profits as they used before and some of them exit the market. Thus, the quantity of goods supplied decreases significantly and the products are sold at lower prices. In some cases where quantity demanded is more than quantity supplied, an artificial shortage of goods and services results leaving rationing as the only solution. Second, sellers compromise the quality of goods and services they supply into the market to sell them at a lower cost price at which buyers are willing to pay. Third, most buyers are unable to afford the legal market price and thus engages in illegal activities such as black markets. Consequently, goods and services are sold at prices higher than the legally-set price because amount supplied is usually less the in normal markets. Fourth, sellers discriminate the buyers who can buy from them based on financial ability of a person. Sixth, imposition of tax whether on sales price andor production costs result in high prices of goods and this may drive majority sellers out of the market (Robert, 2002, pp 40-45).