The Concept Of Competitive Market

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The concept of competitive market can be explained by saying that there is a large number of firms competing each other with a large number of buyers, selling an identical product. There is also perfectly freedom to entry and to leave the industry. One of the consequence of this type of market is that the firms are price taker, which means that if they try to raise the price by one unit for example, the consumers will buy somewhere else and therefore they will leave, due to the competition from the other firms. This lead to a perfectly elastic demand curve for any given product. The last presumption is that the producer and consumers are aware of the current price and have perfect knowledge of the market, where they can gain this…show more content…
The “chartists” as they are also known, study charts that represents price movement over a period and claim that future repetition of certain patterns can be predicted. Although Economist don’t approve Technical analyst approach, in the last two decades it had great influence on the forex market. On the other side there is the theory of Purchasing Power Parity (PPP) which states that the rate will adjust to the point where international purchasing power is equal. In other word that mean that the price of any good would be the same in every country, a simple example would be like The Economist states in its Big Mac index.2 This means that one of the most important factor for exchange rates movement is the different inflation rates between countries, because high prices make a country’s good uncompetitive, the appreciation or depreciation of such currency could in theory restore the balance. Last theory is the portfolio balanced model which argue that exchange rates are relative to the prices of international financial assets such as shares and bonds. So the expectations of the risk and return of these assets determine exchange rate movements because investor could shift their portfolio between different countries. This theory can be very persuasive because for example major economic or political events have a very quick effect on the financial markets. After all, like every kind of market in the world shows that prices

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