A Perfectly Competitive Market and the Housing Industry

What is a perfectly competitive market? A perfectly competitive market is defined as something that occurs in an industry when that industry is made up of many small firms producing homogeneous products, when there are no impediment to the entry or exit of firms, and when full information is available (Baumol and Blinder, 200). In other words, when competition is at its greatest possible level, it describes a market structure in a perfect competition. A perfect competitive market consists of many buyers and sellers and therefore each buyer or seller is a price taker. All sellers tend to supply the same identical product. When four conditions are satisfied, a market is said to operate under perfect competition. We need to be able to define and explain the four conditions which are numerous small firms and customers, homogeneity of product, freedom of entry and exit, and perfect information.

First, numerous small firms and customers is defined as competitive markets contain so many buyers and sellers that each one constitutes a negligible portion of the whole- so small, in fact, that each player’s decisions have no effect on price (Baumol and Blinder, 200). In other words, although there are many buyers in the market, they cannot control the prices because prices are fixed through the forces of supply and demand. The more buyers and sellers there are, the less bargaining authority they both have. So no matter how much is purchased, the price stays constants. Moreover, buyers are said to be price takers. However, in the housing market, there are a variety of houses to choose from; for example, some buyers will consider how big, the location, and the price of the house they want to buy. In this particular economic setting, the housi...

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...ere is still financial problems they face. The article also states that “U.S. home values continue to rise as buyers compete for a limited supply of properties for sale (Jafari, 1).” In other words the competition is still there. Many are wanting houses, and there is either too many buyers or not that many houses for sale. So not much has really changed.

Finally, understanding what a perfectly competitive market is and how it plays a role in economics allows us to see how things come into play. However, I feel as though not all things are perfect and therefore real world competition works differently than a perfectly competitive market. Markets may contain elements such as numerous small firms and customers, homogeneity of product, freedom of entry and exit, and perfect information; however, we know that it is not perfect and that there are some glitches to it.