In macroeconomics, what conditions must exist in order for a market to function competitively?

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

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In order for perfect competition to exist, a number of conditions must apply.  They include:

  • Large number of firms.  There need to be many small firms in order to have perfect competition.
  • Homogeneous product.  All of the firms need to be selling a product that is completely identical.  There can be no sense in which one firm has a product that is seen as superior.
  • Easy entry and exit from the market.  Firms must be able to enter or leave the market at will.

There is also monopolistic competition.  This is very similar to perfect competition.  The only real difference is that the firms are selling products that are differentiated.  The firms can try to contrast their products with those of their competitors.  

When these conditions exist, markets are competitive.

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