If the market was a perfect world, there would be perfect competition. Perfect competition describes the hypothetical market form where no buyer or seller has the ability to influence prices. It is the theory on which supply and demand is built.

The competitive market theory follows the belief that there must be competition to keep the economy going. Oftentimes, the competitive market needs a middleman to step in and broker the relationship between buyer and seller. This brokering is the market equilibrium.

Perfect Competition

To achieve perfect competition, five requirements are necessary. First, there needs to be a large number of small producers and consumers that have no impact on each other. Second, goods and services must be interchangeable. Third, all firms know the exact pricing of the other firms. Fourth, all firms have the same access to technology and resources. And fifth, any firm may enter or exit the market at will.

Of course, meeting all five of the situations are unlikely. In fact, meeting even one requirement is unlikely. The market place gets close to perfect competition with the agricultural market. For example, several local farmers grow peaches. Their chief consumers are the area grocery stores who pay a set price per bushel, and all of the farmers are aware of this price. The peaches are then sold under the banner of “local,” not by individual farm. What keeps agriculture from being perfect competition is government regulation, which warps the market theory. However, even without government regulation, not all farms will have the same access to technology or resources.

The market stalls and shops seen in tourist areas of cities, where the merchandise is virtually all the same, as are the prices.

Imperfect Competition

Whenever perfect competition is not met, it becomes imperfect competition. This is how most of the market works. Imperfect competition is found when there is a lack of information about the items being sold or traded. It may also come about due to a lag time in the marketplace. This happens when there is a need for a service or supply but there are not enough people available to provide the goods or the service.