A market economy is economy based on the power of division of labor in which the prices of goods and services are

determined in a free price system set by supply and demand. Four Market Models Pure Competition:

Involves very large numbers of firms producing identical products. Standardized product (a product identical to that of other producers--ex. corn or cucumbers). no attempt to advertise or differentiate Free Entry and Exit: no significant legal, technological, financial, or other obstacles prohibiting new firms from selling their output in any competitive market No control over the price: "Price Takers" (i.e. the firms have no market power) .

The individual firm has very little to no impact on the market.

Demand is perfectly elastic. Maximizes productive and allocative efficiency. ex. Agriculture pure competition markets do not actually exist. Note: Pure competition does not actually exist in our society, and the agriculture industry is the closest industry to being purely competitive. The pure competition model is used as a standard to evaluate the efficiency of our economy (something to compare to and help our understanding of economy.) Monopolistic Competition:

Involves large number of firms, but not as many as in pure competition. Produces differentiated products (ie. clothing, furniture, books) Nonprice competition - a selling strategy in which firms try to distinguish their product or service on the basis of attributes such as design and workmanship (product differentiation) Focuses mostly on advertising, brand names, and trademarks Firms can easily enter or leave this market, although not as easily as firms in a purely competitive market. Imperfect Competition. Limited control over prices

ex. retail trade, dresses, shoes

Oligopoly:

Involves a few firms that exert considerable influence over the industry Produces either standardized or differentiated products. NONPRICE COMPETITION: emphasis on product differentiation Existing firms are strong rivals and affects each other's price and output. Control over price limited by mutual interdependence; considerable with collusion (the decision of rivals). Harder for a firm to enter or exit. Imperfect competition. A great deal of nonprice competition, especially with differentiated products

ex. steel, automobiles, household appliances

Pure Monopoly:

Only one firm is involved. Products are unique with no substitutes. NONPRICE COMPETITION: mostly public relations Entry of additional firms is not possible--one firm constitutes the entire industry. Entry to the industry is often blocked by government. It requires patent or licenses. Since the monopolist produces a unique product, it makes no effort to differentiate its product. Imperfect Competition. There is total control over price "Price Makers"

o o o

ex. local electric utility Oil, John D. Rockefeller diamonds

A market system is any systematic process enabling many market players to bid and ask: helping bidders and sellers interact and make deals. It is not just the price mechanism but the entire system of regulation, qualification, credentials, reputations and clearing that surrounds that mechanism and makes it operate in a social context.

In economics, market structure (also known as the number of firms producing identical products.)

Monopolistic competition, also called competitive market, where there are a small number of dependent firms which each have a very large proportion of the market share and products from different companies are different.

Oligopoly, in which a market is dominated by a small number of firms which own more than 40% of the market share. Duopoly, a special case of Oligopoly. Oligopsony, a market, where many sellers can be present but meet only a few buyers. Monopoly, where there is only one provider of a product or service. Natural monopoly, a monopoly in which economies of scale cause efficiency to increase continuously with the size of the firm. A firm is a natural monopoly if it is able to serve the entire market demand at a lower cost than any combination of two or more smaller, more specialized firms.

Monopsony, when there is only one buyer in a market.

The imperfectly competitive structure is quite identical to the realistic market conditions where some monopolistic competitors, monopolists, oligopolists, andduopolists exist and dominate the market conditions. The elements of Market Structure include the number and size distribution of firms, entry conditions, and the extent of differentiation. These somewhat abstract concerns tend to determine some but not all details of a specific concrete market system where buyers and sellers actually meet and commit to trade. Competition is useful because it reveals actual customer demand and induces the seller (operator) to provide service quality levels and price levels that buyers (customers) want, typically subject to the sellers financial need to cover its costs. In other words, competition can align the sellers interests with the buyers interests and can cause the seller to reveal his true costs and other private information. In the absence of perfect competition, three basic approaches can be adopted to deal with problems related to the control of market power and an asymmetry between the government and the operator with respect to objectives and information: (a) subjecting the operator to competitive pressures, (b) gathering information on the operator and the market, and (c) applying incentive regulation.

Market Structure

Seller Entry Barriers

Seller Number

Buyer Entry Barriers

Buyer Number

Perfect Competition Monopolistic competition Oligopoly Oligopsony Monopoly Monopsony

No

Many

No

Many

No

Many

No

Many

Yes No Yes No

Few Many One Many

No Yes No Yes

Many Few Many One

The correct sequence of the market structure from most to least competitive is perfect competition, imperfect competition,oligopoly, and pure monopoly. The main criteria by which one can distinguish between different market structures are: the number and size of producers and consumers in the market, the type of goods and services being traded, and the degree to which information can flow freely.