Competitive Market: Definition, Characteristics & Examples

In this lesson, we will look at competitive markets, along with five characteristics that make up this type of market. The lesson will be concluded with a summary and a quiz.
Competitive Market Defined
There are many things about the goods and services we purchase that we hardly give much thought to. For instance, who decided what goods to produce? How much influence does the consumer really have on the products firms decide to make? In this lesson we will take some time to learn about the goods and services that have become such a big part of our lives. A look at these questions and more will help us to better understand the concept of competitive market.

A competitive market is one where there are numerous producers that compete with one another in hopes to provide goods and services we, as consumers, want and need. In other words, not one single producer can dictate the market. Also, like producers, not one consumer can dictate the market either. This concept is also true where price and quantity of goods are concerned. One producer and one consumer can’t decide the price of goods or decide the quantity that will be produced.

A great example of competitive market is farming. There are thousands of farmers and not one of them can influence the market or the price based on how much they grow. All the farmer can do is grow the crop and accept whatever the current price is for that product. They do not get to determine the price they want to sell the crop for.

Characteristics of a Competitive Market
Okay, we know that competitive markets contain multiple firms and multiple consumers influencing the products that are produced. So, the next step is looking at the five major characteristics that are often associated with these types of markets.

1. Profit

If there is money to be earned, there is interest. When a firm has the opportunity to make a profit, this provides an incentive for them to go ahead and enter the market. For example, if a company is thinking about producing bubblegum, and they learn that they can make money doing so, they will use that money incentive to enter the competitive market and begin to produce the bubblegum.

2. Diminishability

This simply means that as more products are purchased, there will be less stocks available. As the stocks diminish, the price will rise. For example, if an individual buys a red car, there will be fewer red cars available for other consumers to buy. Therefore, the producer may raise the cost of the red cars because they know that other consumers will be willing to pay more so they can get one of the last remaining red cars.

3. Rivalry

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