A Level Economics AQA Practice Exam

What defines a competitive market?

1. A few sellers dominate the market

2. A single seller controls prices

3. Many buyers and many sellers, influencing market prices

4. A single firm producing a unique product

The correct answer is: Many buyers and many sellers, influencing market prices

In a competitive market, the defining characteristic is the presence of many buyers and many sellers. This structure allows for numerous participants to influence the market prices through their buying and selling decisions. In such a market, no single buyer or seller has the power to control prices, as they are all price takers. Each seller offers similar or identical products, which keeps competition high, and consumers have the option to choose from multiple suppliers, encouraging efficiency and innovation. The dynamics of a competitive market lead to outcomes that generally benefit consumers, including stable prices and a variety of choices. When many firms compete, they strive to improve their products and reduce production costs to attract more customers. This environment fosters an equilibrium where supply meets demand, and prices reflect the true value based on consumer preferences and the cost of production. This contrasts with scenarios where a few sellers dominate the market, where the market may veer into oligopoly, or where a single seller controls prices, characteristic of monopoly. Similarly, a single firm producing a unique product does not contribute to a competitive market framework since it limits substitutes and alters the dynamics of price-setting.