<p>The Oxford Dictionary definitions provide a good starting point, and align well with how economists generally use these terms. However, as various comments have noted, formal definitions will differ. This will especially be true for &quot;free market&quot;, because it is not a technical term in economics.</p>
<blockquote>
<p><strong>Perfect Competition</strong>: The situation prevailing in a market in which buyers and sellers are so numerous and well informed that all elements of monopoly are absent and the market price of a commodity is beyond the control of individual buyers and sellers.</p>
<p><strong>Free Market</strong>: An economic system in which prices are determined by unrestricted competition between privately owned businesses.</p>
</blockquote>
<p>For perfect competition, the key feature is that <em>the market price is beyond the control of individual buyers and sellers</em>. The way this is often formally stated is that the elasticity of demand is zero for every individual seller, and the elasticity of supply is zero for every individual buyer.</p>
<p>For the free market definition, the key point is that interactions are unrestricted. That means, for example, no government intervention. Wikipedia and a few other sources suggest that free markets preclude market power. If you take that view, then a free market implies perfect competition since no market power means zero elasticities.</p>
<p>However, most definitions of a free market do not rule our market power. In that case, the presence of any of a host of imperfections (e.g., imperfect information, barriers to entry) can generate market power, and therefore imperfect competition despite interactions being unregulated. The distinction then seems to be the lack of external intervention.</p>

CC BY-SA 3.0
2017-06-18T22:46:49.040Z
2017-06-18T22:46:49.040Z
2020-06-17T09:40:54.643Z
saturno
<p>Definitions taken from the 5th edition (2017) of "<a href="https://global.oup.com/academic/product/a-dictionary--of-economics-9780198759430?q=dictionary%20of%20economics&amp;lang=en&amp;cc=gb" rel="nofollow noreferrer">A Dictionary of Economics</a>", published by the Oxford University Press:</p>

<ul>
<li>Free market:</li>
</ul>

<blockquote>
  <p>A market in which people buy and sell voluntarily, without legal compulsion. Neither the quantities traded nor the price at which trade takes place are subject to control by third parties. This is not to say that such markets operate without legal regulation: the participants have to conform to laws concerning health and safety, weights and measures, labelling requirements, and so on. The essential point about these rules, however, is that they lay down the basis for property rights and contract law. The actual initiative to trade still lies with the market participants, on both sides.</p>
</blockquote>

<ul>
<li>Perfect competition (a type of market arrangment, so similar to perfectly competitive market):</li>
</ul>

<blockquote>
  <p>An idealized market situation in which all information is known to all market participants, and both buyers and sellers are so numerous that each is a price-taker, able to buy or sell any desired quantity without affecting the market price. It was once thought that these were the assumptions necessary to describe a competitive economy. This is not the case. Provided all market participants have symmetric information (but not necessarily complete information) and act as if they were price-takers, the competitive equilibrium will emerge.</p>
</blockquote>

CC BY-SA 3.0
2017-09-22T08:23:19.390Z
2017-09-22T08:23:19.390Z
luchonacho
<p>"Free market" is a vague everyday expression and has no formal definition, meaning that you will find it used with different meanings. Therefore it is not possible to "compare" it to the concept of "perfectly competitive market", which has an established formal definition in the Economics discipline, one that can be found in many places. And even when economists want to use a variant of the concept, they clearly spell out which proeprties hold and which not.</p>

<p>Just to list the properties of a perfectly competitive market in a static setting: no barriers to entry, no other costs except for the product price, identical consumers, identical supliers, single homogeneous perishable good, price-taking behavior from all participants, complete perfect and symmetric information (everybody knows everything there is to know and all knowledge is correct). And no government intervening with regulations or taxes.</p>

<p>If I am forgetting something, please edit accordingly.</p>

CC BY-SA 3.0
2017-06-15T16:59:09.007Z
I don't think free market is such an [ambiguous word](http://www.oed.com/view/Entry/270868?redirectedFrom=free+market#eid). In any case, the point of providing references is precisely to lower any ambiguity. There have been/are plenty of economists talking about free market, since many centuries ago. The link above seem to indicate they more or less refer to the same thing. The [Wikipedia](https://en.wikipedia.org/wiki/Free_market) roughly agrees with the OED definition too.
luchonacho
CC BY-SA 3.0
2017-06-15T17:35:48.427Z
@luchonacho The second paragraph of the wikipedia article is a very good example as to why the term should better be avoided in scientific work. And if we wanted to formally define it for such need, we should then fall back to timeless advice to avoid "loaded" terms in scientific terminology in any case. And "freedom" is certainly such a term.
Alecos Papadopoulos
CC BY-SA 3.0
2017-06-16T15:54:38.587Z
My point is that using "free trade" as defined in the OED would raise, I guess, little controversies. I wonder how many users would complain about such definition.
luchonacho
CC BY-SA 3.0
2017-06-16T15:57:25.347Z
@luchonacho "Free trade" is not the same thing as "free market". Trade is an activity. Market is a structure.
Alecos Papadopoulos
CC BY-SA 3.0
2017-06-16T16:01:15.123Z
Typo.... just coming from a trade question :) I meant Free market.
luchonacho
CC BY-SA 3.0
2017-06-18T12:28:06.593Z
I'm not sure either that perfect competition require identical consumers (or [workers](http://www.sciencedirect.com/science/article/pii/S1573446386010155) in the labour market). It does not even require [complete information](https://economics.stackexchange.com/a/16450/2776). So more than adding elements to your answer, I think proper references are needed to back up the claims. Hopefully the bounty will encourage this.
luchonacho
CC BY-SA 3.0
2017-06-15T15:45:31.707Z
2017-06-15T15:51:14.330Z
2017-06-15T15:51:14.330Z
Alecos Papadopoulos
<p>A perfectly competitive market is a special case of a free market. That is, a perfectly competitive market has all the essential characteristics of a free market, but the reverse is not necessarily true.</p>

<p>A <a href="http://www.businessdictionary.com/definition/free-market-economy.html" rel="nofollow noreferrer">free market</a> is one that is free from "outside" interference, either from the government, or from large private sector parties with market power.</p>

<p>In a<a href="http://www.emporia.edu/~ghoshdip/Lecture%20Notes/Chap14.Competition.pdf" rel="nofollow noreferrer"> perfectly competitive market,</a> there are no barriers to entry, all competitors are of equivalent size and power, and there are "many" such competitors. A free market doesn't always have these "guarantees," of competition, only "weaker" conditions such as barriers to entry and differences in size not being factors in restricting the market's freedom. </p>

<p>The key precondition of a perfectly competitive market is the <a href="http://www.economicprofit.org/UalYZ/Zero-Economic-Profit.html" rel="nofollow noreferrer">zero (economic) profit</a> condition. That is, all "agents" are earning zero profits after covering the costs of their factors of production. Because there are no surpluses, no one has an incentive to disturb the competitive equilibrium, and no rational agent will. In most free markets (other than a perfectly competitive one), there are economic surpluses to be obtained if someone muddies the waters to their own advantage, which is to say that there is no guarantee that those free markets will remain free.</p>

CC BY-SA 3.0
2017-06-18T19:02:23.920Z
2017-06-25T22:55:47.503Z
2017-06-25T22:55:47.503Z
Tom Au
<p>According to Hayek in his book <strong>The Road to Serfdom</strong>, <em>coercion</em> is actually neccessary for a free market though of course it’s not seen as such as its part of the legal framework within which the free market operates. </p>

<p>For example, strong <em>regulatory</em> powers of scrutiny and intervention are required to prevent monopolies from forming; and also to break them up when they have formed. </p>

<p>A perfectly competitive market is a mathematical hypothesis used to understand the broad contours of economic theory. It misses out a great deal - for example, questions of assymmetry and power and where these are invested. </p>

CC BY-SA 4.0
2019-01-25T05:58:31.263Z
2019-01-25T07:02:13.043Z
2019-01-25T07:02:13.043Z
Mozibur Ullah
<p>I am trying to find the distinction between a free market and a perfectly competitive market, and I can't find the right definition on what makes them different. <strong>Can someone give me a clearly expressed definition on what makes one different from the other.</strong></p>

<p><strong>Please Note: I am looking for a reference based answer.</strong></p>

<microeconomics><competition>
What is the difference between a free market and a perfectly competitive market?
The Artist
# What is the difference between a free market and a perfectly competitive market?

(Asked by: username_0 on 2017-06-15)

I am trying to find the distinction between a free market and a perfectly competitive market, and I can't find the right definition on what makes them different. **Can someone give me a clearly expressed definition on what makes one different from the other.**

**Please Note: I am looking for a reference based answer.**

**Tags:** microeconomics, competition

---

## 5 answers

### Answer by username_1 on 2017-06-18. Score: 2

The Oxford Dictionary definitions provide a good starting point, and align well with how economists generally use these terms. However, as various comments have noted, formal definitions will differ. This will especially be true for "free market", because it is not a technical term in economics.

> **Perfect Competition**: The situation prevailing in a market in which buyers and sellers are so numerous and well informed that all elements of monopoly are absent and the market price of a commodity is beyond the control of individual buyers and sellers.
>
> **Free Market**: An economic system in which prices are determined by unrestricted competition between privately owned businesses.

For perfect competition, the key feature is that *the market price is beyond the control of individual buyers and sellers*. The way this is often formally stated is that the elasticity of demand is zero for every individual seller, and the elasticity of supply is zero for every individual buyer.

For the free market definition, the key point is that interactions are unrestricted. That means, for example, no government intervention. Wikipedia and a few other sources suggest that free markets preclude market power. If you take that view, then a free market implies perfect competition since no market power means zero elasticities.

However, most definitions of a free market do not rule our market power. In that case, the presence of any of a host of imperfections (e.g., imperfect information, barriers to entry) can generate market power, and therefore imperfect competition despite interactions being unregulated. The distinction then seems to be the lack of external intervention.


---

### Answer by username_2 on 2017-09-22. Score: 1

Definitions taken from the 5th edition (2017) of "[A Dictionary of Economics](https://global.oup.com/academic/product/a-dictionary--of-economics-9780198759430?q=dictionary%20of%20economics&lang=en&cc=gb)", published by the Oxford University Press:

* Free market:

> A market in which people buy and sell voluntarily, without legal compulsion. Neither the quantities traded nor the price at which trade takes place are subject to control by third parties. This is not to say that such markets operate without legal regulation: the participants have to conform to laws concerning health and safety, weights and measures, labelling requirements, and so on. The essential point about these rules, however, is that they lay down the basis for property rights and contract law. The actual initiative to trade still lies with the market participants, on both sides.

* Perfect competition (a type of market arrangment, so similar to perfectly competitive market):

> An idealized market situation in which all information is known to all market participants, and both buyers and sellers are so numerous that each is a price-taker, able to buy or sell any desired quantity without affecting the market price. It was once thought that these were the assumptions necessary to describe a competitive economy. This is not the case. Provided all market participants have symmetric information (but not necessarily complete information) and act as if they were price-takers, the competitive equilibrium will emerge.


---

### Answer by username_3 on 2017-06-15. Score: 1

"Free market" is a vague everyday expression and has no formal definition, meaning that you will find it used with different meanings. Therefore it is not possible to "compare" it to the concept of "perfectly competitive market", which has an established formal definition in the Economics discipline, one that can be found in many places. And even when economists want to use a variant of the concept, they clearly spell out which proeprties hold and which not.

Just to list the properties of a perfectly competitive market in a static setting: no barriers to entry, no other costs except for the product price, identical consumers, identical supliers, single homogeneous perishable good, price-taking behavior from all participants, complete perfect and symmetric information (everybody knows everything there is to know and all knowledge is correct). And no government intervening with regulations or taxes.

If I am forgetting something, please edit accordingly.

> **Comments:**
> **username_2**: I don't think free market is such an [ambiguous word](http://www.oed.com/view/Entry/270868?redirectedFrom=free+market#eid). In any case, the point of providing references is precisely to lower any ambiguity. There have been/are plenty of economists talking about free market, since many centuries ago. The link above seem to indicate they more or less refer to the same thing. The [Wikipedia](https://en.wikipedia.org/wiki/Free_market) roughly agrees with the OED definition too.  
> **username_3**: @luchonacho The second paragraph of the wikipedia article is a very good example as to why the term should better be avoided in scientific work. And if we wanted to formally define it for such need, we should then fall back to timeless advice to avoid "loaded" terms in scientific terminology in any case. And "freedom" is certainly such a term.  
> **username_2**: My point is that using "free trade" as defined in the OED would raise, I guess, little controversies. I wonder how many users would complain about such definition.  
> **username_3**: @luchonacho "Free trade" is not the same thing as "free market". Trade is an activity. Market is a structure.  
> **username_2**: Typo.... just coming from a trade question :) I meant Free market.  
> **username_2**: I'm not sure either that perfect competition require identical consumers (or [workers](http://www.sciencedirect.com/science/article/pii/S1573446386010155) in the labour market). It does not even require [complete information](https://economics.stackexchange.com/a/16450/2776). So more than adding elements to your answer, I think proper references are needed to back up the claims. Hopefully the bounty will encourage this.  

---

### Answer by username_4 on 2017-06-18. Score: 0

A perfectly competitive market is a special case of a free market. That is, a perfectly competitive market has all the essential characteristics of a free market, but the reverse is not necessarily true.

A [free market](http://www.businessdictionary.com/definition/free-market-economy.html) is one that is free from "outside" interference, either from the government, or from large private sector parties with market power.

In a [perfectly competitive market,](http://www.emporia.edu/~ghoshdip/Lecture%20Notes/Chap14.Competition.pdf) there are no barriers to entry, all competitors are of equivalent size and power, and there are "many" such competitors. A free market doesn't always have these "guarantees," of competition, only "weaker" conditions such as barriers to entry and differences in size not being factors in restricting the market's freedom.

The key precondition of a perfectly competitive market is the [zero (economic) profit](http://www.economicprofit.org/UalYZ/Zero-Economic-Profit.html) condition. That is, all "agents" are earning zero profits after covering the costs of their factors of production. Because there are no surpluses, no one has an incentive to disturb the competitive equilibrium, and no rational agent will. In most free markets (other than a perfectly competitive one), there are economic surpluses to be obtained if someone muddies the waters to their own advantage, which is to say that there is no guarantee that those free markets will remain free.


---

### Answer by username_5 on 2019-01-25. Score: 0

According to Hayek in his book **The Road to Serfdom**, *coercion* is actually neccessary for a free market though of course it’s not seen as such as its part of the legal framework within which the free market operates.

For example, strong *regulatory* powers of scrutiny and intervention are required to prevent monopolies from forming; and also to break them up when they have formed.

A perfectly competitive market is a mathematical hypothesis used to understand the broad contours of economic theory. It misses out a great deal - for example, questions of assymmetry and power and where these are invested.


---

