Unit 5: Market

Concepts

What is a “market”
The market as a concept in economics is defined as one of the various systems, institutions, procedures,
social relations and infrastructures in which the parties (economic agents) participate in the exchange.
Markets are very important as they determine the type of the economy.

While it is possible to exchange goods and services through barter, most markets depend on sellers
offering their products or services (including labor) in exchange for money from buyers. It can be said that
the market is the process by which the prices of goods and services in an economy are established.

The market economy revolves around the exchange between individuals (or families), who buy goods and
services from companies, and companies that use inputs or factors of production, and obtain products, it
is also known as economic forces.

The term market is commonly used to evoke the image of a crowded local market, such as a physical
location. But in reality the definition of the market in economics is an abstract concept. There is even no
physical market for most goods and services. There are also different types of market with different results
for suppliers and demanders.

Markets are the main economic element or component studied by economists. Who also study relevant
elements for their economic results such as market failures, international markets, macroeconomic
environment, public policies, regulations, etc.
Market types or classes by economic importance

• Financial or capital market

• Working market
• Market of goods and services
• Financial or capital market

In general, when talking about the financial market, reference is made to the purchase of bonds and stocks
(of the Wall Street type), but in reality the term is broader since it refers to the markets where they are
captured, lent and taken. financial resources, including banks and insurers. For example, the purchase of
life insurance.

Forex market

The currency market or Forex is a financial market and refers to the purchase and sale of currencies. The
main participants in the foreign exchange market are financial institutions, commercial companies, central
banks and private individuals through intermediaries. It is very important as a regulator of monetary flow
in international trade.

Capital market

The capital market is a kind of financial market, it is bought and sold representative of the financial assets
of companies such as shares.

Working market

This type of market is the least visible in the economy. In the labor market, families sell labor services
(offer their work) for a salary and companies buy these services (demand work). For example, an airplane
pilot who sells his work to an airline in exchange for a salary.

Market of goods and services

The market for goods and services is the best known and is what many think about when trying to define
what the market is. In this, companies offer the products and services they produce to families or other
companies, and these, in turn, demand said goods and services. Supermarkets, hairdressers, hardware
stores, restaurants among others are examples where products or services are sold in exchange for
money.

When economists reflect on how markets work, they focus their attention on the relationships between
firms and households. A person can act at the same time as a business or a family, can sell goods, hire
work and invest their capital at the same time as they buy other goods, sell their work and borrow. The
product, labor and capital markets can participate in the three main market categories.

These categories or types of markets are useful to study the relationships between buyers and sellers, as
well as the results for those involved. According to the market model, high or low prices, profit losses,
price restrictions, competition, maximum business profits, variety of products, market strategies, etc.
result.
Perfect competition market

In this case there are many buyers and sellers, all buying and selling the same good or service. All sellers
are forced to sell at the same price, since if they charged more they would lose sales to their competitors,
companies are price-accepting, that is, they cannot influence the market price.

This conception is mostly theoretical because in reality it is very difficult to find a market with the
necessary characteristics to have perfect competition. The financial market is the one that most closely
resembles perfect competition.

Imperfect competition market

There are several types of imperfectly competitive markets, and they are also the most common in today's
countries. They can be classified as monopolies, oligopoly, monopsony, or monopolistic competition.

Monopoly

In this type of market a single company controls the

entire supply and there are many buyers. There is no
competition for the offering company (monopolist).
It sets the market price seeking to maximize its
profits, although it can only increase sales if the price
decreases. Consumers in this type of market are at a
clear disadvantage because they must
accommodate the prices, quantity and quality
offered by the monopoly.

Monopolies are created thanks to barriers to entry,

these can be:

• Public policies: patents or public utility

companies.
• Exclusive property of a factor of production: a company that takes over all the mines of a mineral
necessary in the production of a good.
• Market strategies: dominant companies in a market can lower prices upon the arrival of a new
competitor and thus drive them out of the market. This is an illegal practice.
• Natural monopoly: Sometimes the technology necessary to produce a good can lead to the
existence of a monopoly. For example, it would be inefficient for multiple companies to build
multiple metro lines in a city so that there would be competition between transport providers, so
the best option is for a single company to control the entire metro travel market.
Oligopoly

The oligopoly is a market class where there are only a few companies (more than 3, if there are 2 it is a
duopoly), so there is some competition, and many buyers. The point here is that each company is
concerned with how its rivals will react to whatever strategy it employs, for example what other
companies will do if it increases the price. An example is the cell phone market where operators change
their prices when the competition does.

Monopsony

Contrary to monopoly, in this market there are many sellers, but only one buyer in control of the demand,
who determines the market price. An example is a banana marketer that purchases all production from
agricultural producers in a country or region.

Monopolistic competition

In this kind of market, each company produces a product slightly different from the others, but
substitutable by those of other producers. The bidders have their own monopoly thanks to their brand,
but they offer them in a market where there are similar products. For example, Apple offers the iPhone
and is the only one that produces it, it is a monopoly in the iPhone market, but it is offered in a cell phone
market where it has to compete with other companies.

In the markets of big brands there is monopolistic competition, for example, smartphones, cars, clothes,
computers, televisions, among others.

In this type of market there is more competition than in the oligopoly since there are several companies,
but not enough for there to be perfect competition.

Market frontiers and globalization

In the last two centuries, the geographic scope of markets has increased dramatically thanks to
technological improvements in means of transport, from steamboats to airplanes to trains, which have
lowered transport costs. Economies are no longer isolated by natural barriers, there is now a growing
world market where countries export and import all kinds of goods and services.

The expansion of markets is beneficial for consumers as competition between companies generally
increases, which lowers the prices paid by buyers. An example of expanding markets is the book market.
20 years ago a local bookstore could be the only one in town and control the entire book market, imposing
its prices. Now with the internet it is possible to buy books from the other side of the world and even buy
digital versions that replace the paper ones. These technological advances have redefined what the
market is and its scope.

Black markets
 The black market or underground economy is a type of
market in which goods or services are traded illegally.
Due to the nature of its transactions, the market is
forced to operate outside of the formal economy. The
most common reasons for operating in black markets
are smuggling, taxes, price controls, and quantity and
quality restrictions. Some examples of black markets
are: illegal drugs, sexual exploitation, forced labor,
weapons, and exotic animals.

Market measurement

For most companies, the concept of market measurement is easy to understand, but not easy to do. Many
are blind to setting limits or defining the market even before they get to the analysis of the data or
implications of their research. Calculating the size of the market can answer strategic questions about
investment levels in the business and profitable growth objectives. Market measurement can also serve
as a quick understanding of the potential of a B2B market opportunity in terms of volume or value and is
therefore important for business strategy and decision making.

The following are the 5 basic steps to estimate the size of the market and thus calculate its size

1.- Define the market

Knowing the level of detail necessary to address your strategic questions is the key to correctly
determining your market measurement approach.

Defining your target market should always be the first step in calculating your market size, and it is critical
that you stay within your established market definition during the data collection process.

Market size can be viewed in terms of the combined volume of revenue or units in a specific market. Many
times a company or investor will need the market size or the total available market of a specific geographic
area.

Using the example of food packaging, the total available market can be calculated by adding the sales of
food packaging producers in a particular geographic region or market segment.

2.- Determine your approach

There are two basic methodologies to determine the size of the market: descending and ascending. Your
selected approach may be based on the market information that is available. However, the best approach
is to develop estimates of the market size using both methodologies to have greater confidence in your
estimate.

The top-down methodology uses a broad figure of the market and determines the percentage that the
target market represents. In general, a top-down approach is usually a faster and more time-efficient
approach.

It's great for validation or a quick assessment of market size, but will rarely provide the detail needed for
true opportunity analysis. The bottom-up method is a more valid estimate because it is less likely to
include income or non-accessible units.

3.- Select sources

Your selected approach will dictate the sources necessary to estimate the size of the market. Secondary
or documentary research looks for existing data and is the most used form of research in this type of
exercise since it is faster to obtain and therefore more profitable.

By searching the web, you can find a great deal of information for free or at low cost. Subscription-based
research is a good place to start, however there are also free sources that contain valuable information.

Articles about the companies or products in the target market will often cite data from these sources. You
can also review product announcements and reports for similar information. Public companies must share
information in analyst and investor reports.

Quarterly and annual reports are normally available on the websites of these companies. Additionally,
trade associations frequently conduct market research and have valuable industry data.

Primary research, also called field research, is often used in addition to secondary research. Primary
research can take many forms and can strengthen your understanding of the market, allowing you to
make better-informed assumptions.

For example, you can conduct online surveys and learn market size estimates or determine key
information on market trends, such as technology, market performance, competitive position, or other
information that helps you understand scope and define your target market.

4.- Structuring data

To further develop your understanding of the market, it is important to collect trend information, which
is usually in the form of qualitative data.

This information can be obtained from secondary research or from comments on primary research. Once
the trending information has been collected, you can begin to structure the data by group or topic.

5.- Data analysis

As mentioned above, it is often necessary to develop multiple estimates using different approaches or
sources. This is called triangulation.

When multiple estimates or sources are triangulated, confidence in a market estimate increases. If the
approaches differ widely, further research is required to reduce risk and it is recommended to reduce the
number of market size estimates.

Available Market

The available market for any good or service is the number of buyers who are willing and able to buy the
products offered for sale. In general, this part of the population are those who have some degree of
interest in the products offered, and also have the financial resources to purchase those products when
and as they are produced and delivered for sale.

Potential Market

The potential market refers to the set of individuals that belong to the segment that has been defined for
the commercialization of a product or service. They are those people who need or could need the general
product or service that you want to offer.

In other words, the potential market includes individuals who consume a product or service similar to the
one you offer, people who currently do not consume it (but who need it and for some reason have not
found it), and, finally, to people who currently do not consume it but who probably could in the future.
 Thus, the study of the potential market is
essential to guarantee the growth of your
business, since it ensures, in part, the financial
health of the future by focusing on consumers
who may become interested in the services or
products that you currently offer. your brand.

Characteristics of the potential market

The term potential market has different characteristics, for example:

• All the estimates that result from the analysis of the potential market study are not interpreted in
real terms, since they are obtained from a possible value of the sales of a product or service.
• The potential market seeks to know which are the possible clients (and their needs) of a company,
in order to adapt its future products or services to what this portion of the audience expects.
• The potential market will always consider the highest values of future sales of a product or service.
Potential, available, effective and target market. Imagine you want to open a vegan food restaurant. You
know the best recipes and you know that you will be able to differentiate yourself from your competitors
by offering varied dishes and excellent customer service. In general, your competitors are the other
restaurants identified as vegan or even some vegetarians, who have a few more years of presence in the
market than you.

Although these terms are different, they have something in common, they obey a market segment.
Imagine that the segment you have defined for your restaurant has the following characteristics:

Geographic: Mexico City.

Ages: 20 - 60 years old. Total: 200,000 people.

Socioeconomic level: Middle class. 20% of the population.

Lifestyle: They care about taking care of their health and finding a conscious eating option. It is 50% of the
population.

According to this logic, the potential market would be all the people who live in Mexico City, who are 20-
60 years old, who belong to the middle class and who are looking for conscious and healthy food options.

The available market is made up of the set of consumers who have the need to buy the product or service,
but not only of a general nature, but with more specific characteristics. In this case, we refer to people
who have the need to consume vegan and vegetarian food in general.

The effective market is a segment of the available market and is formed by the set of consumers who have
the need to buy a product or service a little more specific than that corresponding to the available market.
The difference is that, in addition to the specific need, they intend to buy the good or service offered by
the new business. In this example, the effective market would be people looking for vegan food with a
pleasant taste and excellent service.

Finally, the target market is the part of the effective market that the company considers the goal to be
achieved in a given time. Thus, your vegan food restaurant considers that it will serve 10% of the effective
demand, this being its target market.

How is the potential market calculated?

• Define your segment.

• Determine the number of potential buyers within your segment (n).
• Establish the average price of your product or service in the market (p).
• Calculate the average amount of consumption per capita in the market (q).
• The potential market, represented by the letter Q, is the multiplication of the variables n, p and
q, like this: Q = nxpxq

The best way to illustrate this calculation is through an example:

1. Define your segment

Imagine that you want to open a business in Mexico City that is dedicated to the manufacture and
marketing of orange juice in 1-liter bottles. Suppose, furthermore, that you want to supply an entire town,
which has 50,000 people.

2. Determine the number of potential buyers within your segment (n).

Based on your research, you now know that 70% of the people in this locality consume orange juice every
day. Thus, the number of possible buyers (n) of orange juice is

50,000 x 70% = 35,0000 people.

3. Establish the average price of your product or service in the market (p).

After exploring the market and seeing the competitions, you have been able to conclude that the average
price per liter of orange juice in that town is 18 MXN. Establishing the average price of your product is
hard work that takes time; However, if you want your potential market analysis to be conclusive, you
should invest the time necessary in analyzing your competition and the different products or services
similar to yours to know with some certainty how much people on average pay for something similar to
what that you are trying to market.

4. Calculate the average amount of consumption per capita in the market (q).

In the same way, you should investigate what is the average per capita consumption of your product.
Suppose that after you have carried out your research, you have been able to conclude that the average
per capita consumption of orange juice in that locality is 5 liters.

Once you have all the variables, you will be able to know what the potential market is for your product or
service, in this case:

Q = 35,000 x 18 x 5 = 3,150,000 currency units

How is the potential market analyzed?

To begin, it is best to always keep abreast of your potential market, people change, evolve, and their
expectations and needs as well. It is imperative that you can anticipate changes so that you can see them
as quickly as possible.

The analysis of the potential market gives you the security of how far you can go commercially with your
business, it gives you the north and the viability of how far you can invest and how big your business will
be. A potential market assessment includes not only the quantification and qualification of your potential
customers, but also the characteristics of your competition. Remember that at any time you can lose
customers because you serve the same segment and, probably, the market where they compete is the
same.
Additionally, the analysis of the potential market includes knowing in depth your offer, what type of needs
you satisfy, in which sectors you can compete and, mainly, the ideal profile of your clients. This way you
will be able to quantify within a specific region the number of clients that fit that profile and quantify the
possible sales both yours and those of your competitors.

Practice

Define your market precisely.

Some examples of target market are:

"Our target market is vegan women between the ages of 20 and 50 who live in Mexico City and are
interested in their health and nutrition."

"Our target market is men and women between the ages of 18 and 30, with high purchasing power, who
are interested in electronic music festivals and travel."