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Economic Theory

2. There must be buyers and sellers and for that physical presence is
not necessary. In modern days, we sell goods through websites or
electronic shopping markets or through telephonic media.
3. There must be a commodity which is bought and sold.

4. There should be free interaction between buyers and sellers so that
only one price is agreed upon for the commodity.

Economists have classified markets on the basis of:
a) the number of buyers and sellers of the commodity;
b) the nature of the commodity produced by the sellers;
c) degree of freedom in the movement of goods and factors;

d) whether knowledge on the part of the buyers and sellers regarding
prices in the market is perfect or imperfect.
On the basis of these criteria, economists have distinguished between

four basic forms of the market:
1. Perfect competition
2. Monopoly
3. Monopolistic competition

4. Oligopoly
These market forms are discussed as under.
Perfect Competition. A market is said to be perfect when there is a

large number of buyers and sellers of the product and there is a complete
absence of rivalry among the firms. The firms sell products which are
homogeneous.
Features of Perfect Competition. The important features of this type

of market are summarized as follows:
1. Large number of buyers and sellers. The number of buyers and

sellers is so large that no individual buyer or seller can influence the
market price and output by his independent action. The reason for this is
that every buyer and seller purchases or sells a very insignificant amount
of the total output.

2. Homogeneous products. A firm produces a product which is
accepted by customers as homogeneous or identical. There is no way in
which a buyer can distinguish products sold by different sellers. The

assumptions of large numbers of sellers and buyers and of product being
homogeneous indicate that a single firm is a price-taker. Demand curve or
average revenue curve is infinitely elastic, i.e., demand curve is horizontal
straight line parallel to output axis. Therefore, a firm under perfect

competition sells any amount of output at the prevailing market price.

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