A perfectly competitive market requires many buyers and sellers trading an identical (homogeneous) good. The large number of participants is crucial because it means each individual's transaction size is small relative to the entire market. This condition, along with the product's uniformity, ensures that no single individual can influence the market price. At the established market price, participants can buy or sell as much as they want and can easily find other trading partners if a particular offer is not satisfactory. This dynamic results in competition eliminating the bargaining power for all participants.

Perfectly Competitive Market

A fundamental premise of Alfred Marshall's supply and demand model is that the goods being sold are homogeneous, meaning they are all identical in type and quality. This was the case in his example of the corn exchange, where all grain was considered the same. When applying this model to other markets, like second-hand textbooks, the same simplifying assumption is made, treating all books as identical despite potential variations in their actual condition.

Google

Developed by Alfred Marshall, this model explains how prices are determined in markets with numerous buyers and sellers of identical goods. It proposes that a supply curve is shaped by the prices sellers are willing to accept, while a demand curve is determined by the willingness to pay of buyers. A key assumption of this model is that all goods being traded are homogeneous. Marshall contended that through the process of 'higgling and bargaining' in such a market, the price would consistently move towards an equilibrium level where the quantity that buyers demand equals the quantity that sellers supply.

Marshall's Model of Supply and Demand

To cite the ebook, use The CORE Econ Team 2023 The Economy 2.0: Microeconomics Open access e-text https://core-econ.org/the-economy/.

To cite a unit, use The CORE Econ Team 2023 The Economy 2.0: Microeconomics Open access e-text https://core-econ.org/the-economy/ Unit [unit number] (url).

CORE Econ - The Economy 2.0: Microeconomics

During the late nineteenth century, a common feature in most English towns was a corn exchange. This was a dedicated building that served as a marketplace for farmers to meet with merchants and sell their grain. Economist Alfred Marshall prominently used this real-world market as an illustrative example for his model of supply and demand.

The English Corn Exchange

The market for used university textbooks exemplifies how market principles operate, from traditional, decentralized interactions to modern online platforms. In past scenarios, transactions relied on direct negotiation between buyers and sellers to determine a price based on individual willingness to pay (WTP) and willingness to accept (WTA), a dynamic similar to the historical grain markets that economist Alfred Marshall studied to create his supply and demand model. Contemporary versions of this market have shifted to online platforms, streamlining the process of connecting student buyers and sellers.

Market for Second-Hand University Textbooks

Homogeneous Goods Assumption

A widely used economic process for modeling markets with numerous buyers and sellers involves the use of supply and demand curves. These curves illustrate the quantity of a good that sellers will provide and buyers will desire at any given price. By identifying the intersection of these curves, the market-clearing price is determined, which is the point where the quantity supplied equals the quantity demanded.

Learn Before

Related

Learn After