(a) Define a market. (b) Explain four characteristics of a perfect market.

Answer Details

(a) A market. In economics a market is not necessarily a physical place. It is any arrangement or system by which buyers and sellers of a particular good or service are brought into contact to exchange it at an agreed price. It exists wherever such contact and exchange can take place, whether face to face, by telephone or over the internet.

(b) Four characteristics of a perfect market.

1. Large number of buyers and sellers. There are so many that no single buyer or seller can influence the market price; each is a price taker.
2. Homogeneous (identical) product. All sellers offer exactly the same, uniform product, so buyers have no reason to prefer one seller to another.
3. Perfect knowledge of the market. All buyers and sellers have full and up-to-date information about prices and conditions, so the same good sells at one uniform price throughout the market.
4. Free entry and exit. There are no barriers preventing firms from entering the market when profitable or leaving when unprofitable.

Other features include perfect mobility of factors and goods, absence of transport cost, and no government or collusive interference, all of which help establish a single ruling price.

Examination reminder: the whole point of these conditions is that together they produce one uniform price for the product throughout the market; link each characteristic to that result.