market can be represented by supply and demand diagrams but it is
really the "place" in which buyers and sellers interact.
They may be in the same physical place, for example, at an auction or
may be connected by a communication network for example, the stock
exchange. Price is determined in the market and is dependent on the
nature of the competition.
are 4 conditions necessary for pure competition:
The units of the
product must be identical or at least buyers and sellers think they are.
- BUYERS AND SELLERS ARE SMALL
That is, too
small to a have a measurable effect on the price. For example,
individual house builders are not concerned that if they increase their
own production of houses, it will affect the price of a house.
- ABSENCE OF ARTIFICIAL RESTRAINTS
The market is
free of price or output fixing by government, producer associations
etc. Such actions are illegal under the Trade Practices Act.
productive services must be free to move so as to receive the greatest
return and buyers must be free to buy where the price is lowest. That
is, there is not a "captive" market. The only service station in a
remote country town can take advantage of its captive market and keep
the price of petrol high.
price and value.