Markets

Lesson 4 Applied Economics

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What Is a Market?
A market is a place where parties can gather to facilitate the exchange of
goods and services. The parties involved are usually buyers and sellers. The
market may be physical like a retail outlet, where people meet face-to-face, or
virtual like an online market, where there is no direct physical contact
between buyers and sellers.
KEY TAKEAWAYS
•A market is a place where buyers and sellers can meet to facilitate the
exchange or transaction of goods and services.
•Markets can be physical like a retail outlet, or virtual like an e-retailer.
•Other examples include the illegal markets, auction markets, and
financial markets.
•Markets establish the prices of goods and services that are determined by
supply and demand.
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Understanding Markets
Technically speaking, a market is any place where two or more parties can
meet to engage in an economic transaction—even those that don't involve
legal tender. A market transaction may involve goods, services, information,
currency, or any combination of these that pass from one party to another. In
short, markets are arenas in which buyers and sellers can gather and interact.

In general, while only two parties are needed to make a trade, at minimum a
third party is needed to introduce competition and bring balance to the
market. As such, a market in a state of perfect competition, among other
things, is necessarily characterized by a high number of active buyers and
sellers.

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Markets may be represented by physical locations where transactions are made.
These include retail stores and other similar businesses that sell individual items to
wholesale markets selling goods to distributors. Or they may be virtual. Internet-
based stores and auction sites such as Amazon and eBay are examples of markets
where transactions can take place entirely online and the parties involved never
connect physically.

Markets may emerge organically or as a means of enabling ownership rights over

goods, services, and information. When on a national or other more specific
regional level, markets may often be categorized as “developed” markets or
“developing” markets, depending on many factors, including income levels and
the nation or region’s openness to foreign trade.

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Types of Markets
Markets vary widely for a number of reasons, including the kinds of products sold,
location, duration, size, and constituency of the customer base, size, legality, and
many other factors. Aside from the two most common markets—physical and
virtual—there are other kinds of markets where parties can gather to execute their
transactions.

Underground Market

An underground market refers to an illegal market where transactions occur

without the knowledge of the government or other regulatory agencies.
Many illegal markets exist in order to circumvent existing tax laws. This is
why many involve cash-only transactions or non-traceable forms of
currency, making them harder to track.

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 Many illegal markets exist in countries with planned or command economies— FR
wherein the government controls the production and distribution of goods and
services—and in countries that are economically developing. When there is a
shortage of certain goods and services in the economy, members of the illegal
market step in and fill the void.

Auction Market

An auction market brings many people together for the sale and
purchase of specific lots of goods. The buyers or bidders try to top
each other for the purchase price. The items up for sale end up
going to the highest bidder.
The most common auction markets involve livestock, foreclosed
homes, and art and antiques. Many operate online now.

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Financial Market
The blanket term "financial market" refers to any place where securities,
currencies, bonds, and other securities are traded between two parties. These
markets are the basis of capitalist societies, and they provide capital formation and
liquidity for businesses. They can be physical or virtual.
The financial market includes the stock exchanges such as the
New York Stock Exchange, Nasdaq, the LSE, and the TMX Group. Other kinds of
financial markets include the bond market and the foreign exchange market, where
people trade currencies.
Regulating Markets
Other than underground markets, most markets are subject to rules and
regulations set by a regional or governing body that determines the market’s
nature. This may be the case when the regulation is as wide-reaching and as
widely recognized as an international trade agreement, or as local and temporary
as a pop-up street market where vendors maintain order and rules among
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What Is a Black Market?
A black market refers to an illegal exchange or marketplace where transactions occur
without the knowledge or oversight of officials or regulatory agencies. They tend to
spring up when there is a shortage of certain goods and services in the economy, or
supply and prices are state-controlled. Transactions tend to be undocumented and
cash-only, all the better to be untraceable.

How Are Markets Regulated?

Most markets are subject to rules and regulations set by a regional or governing
body that determines the market’s nature. They can be international, national, or
local authorities.

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Models of Competition

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What are Models of Competition?
Def. a description of the type of market that a particular business or
industry operates in.
Also known as Market Structure.

4 Types of Models of Competition

1. Perfect Competition
2. Monopoly
3. Monopolistic Competition
4. Oligopoly

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Perfect Competition
Def. a market structure in which a large number of firms (businesses)
produce the same product.
Only reason to choose one firm over another is the PRICE

Four Conditions for Perfect Competition

1. Many buyers and sellers
People have lots of options to choose whom they buy from.

2. Identical Products
There are no differences between what is sold by different suppliers. They
are exactly the same!
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3. Informed Buyers and Sellers
Buyers know the prices and quality of product sold by all venders to make the best decision
4. Free Market Entry and Exit
Businesses can enter the market when they can make money and exit when they can’t.

What types of businesses are Perfectly Competitive?

Farm Markets (ex. Public Market)
Many farmers selling their vegetables (Many buyers and sellers)
A carrot from farmer Brown is equal to a carrot from farmer Jones (Identical
Products)
Buyers can compare prices and quality by walking the market (Informed
Buyers/Sellers)
Farmers choose to bring produce or not. Inexpensive to rent a space in the
market (Free Market Entry/Exit)
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Are there many perfectly competitive businesses?

NO! All 4 of the conditions must be met for perfect

competition. This is very difficult in most industries.
• Often people can only buy from one supplier
• Products are rarely identical
• Buyers often do not know if a product is
cheaper/better at a different supplier
• Barriers to entry prevent free market entry

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Barriers to Entry
Def. Factors that make it difficult for new firms to enter a
market.
• Technology
Start-up Costs Some markets require a
The expenses that a new high degree of
business must pay before technological know-how.
the first product reaches As a result, new
the customer. entrepreneurs cannot
Ex. Rent, machines, easily enter these
product, labor, etc. markets.
Ex. Software and
Pharmaceutical
companies
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Monopoly
Def. a market dominated by a single seller.
They form when barriers prevent competitors from entering the market. This is
often because of the high costs to supply a product.
They take advantage of their monopoly power and charge high prices.
In the United States most monopolies are illegal.

Examples of Monopolies
During the late 1800s and early 1900s Standard Oil and Carnegie
Steel
From the late 1800s to the 1980s AT&T (also known as Bell
Telephone) had a monopoly on phone service
Microsoft has been accused and convicted in court for having
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Monopolistic Competition
Def. Many companies compete in an open market to sell products that are similar, but not identical.

Four conditions of Monopolistic Competition

1. Many Firms
Monopolistic Companies do not have high start-up costs and so have
more firms.
2. Few Artificial Barriers to Entry
Barriers to entry are relatively low.

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 3. Slight Control over Price FR
Firms have some freedom to raise prices because each firm’s goods are a little different from
everyone else’s
4. Differentiated Products
Firms have some control over selling price because they can differentiate, or distinguish, their
products from other products in the market.

What types of businesses are Monopolistically Competitive?

Lots! Most markets exist in this model.

Ex. Soft Drinks
Coke, Pepsi, RC, WPop, etc. (many firms)
Relatively inexpensive to produce, don’t need huge factories, chemicals, etc. (Few
artificial barriers to entry)
Coke is a little more expensive than WPop (Slight control over price)
Some people like Coke more than Pepsi, etc. (Differentiated Products)

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What Is Monopolistic Competition?

Monopolistic competition characterizes an industry in which many firms offer

products or services that are similar (but not perfect) substitutes. Barriers to entry
and exit in a monopolistic competitive industry are low, and the decisions of any
one firm do not directly affect those of its competitors. Monopolistic competition is
closely related to the business strategy of brand differentiation.
•Monopolistic competition occurs when an industry has many firms offering
products that are similar but not identical.
•Unlike a monopoly, these firms have little power to curtail supply or raise prices
to increase profits.
•Firms in monopolistic competition typically try to differentiate their products in
order to achieve above-market returns.
•Heavy advertising and marketing is common among firms in monopolistic
competition and some economists criticize this as wasteful.
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What Is an Oligopoly?

An oligopoly is a market structure with a small number of firms, none of

which can keep the others from having significant influence. The
concentration ratio measures the market share of the largest firms.

A monopoly is a market with only one producer, a duopoly has two firms,
and an oligopoly consists of two or more firms. There is no precise upper
limit to the number of firms in an oligopoly, but the number must be low
enough that the actions of one firm significantly influence the others.

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•The term "oligopoly" refers to a small number of producers
working, either explicitly or tacitly, to restrict output and/or fix
prices, in order to achieve above normal market returns.

•Economic, legal, and technological factors can contribute to the

formation and maintenance, or dissolution, of oligopolies.

•The major difficulty that oligopolies face is the prisoner's dilemma

that each member faces, which encourages each member to cheat.

•Government policy can discourage or encourage oligopolistic

behavior, and firms in mixed economies often seek government
blessing for ways to limit competition.

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Understanding Oligopolies

Oligopolies in history include steel manufacturers, oil companies,

railroads, tire manufacturing, grocery store chains, and wireless carriers.
The economic and legal concern is that an oligopoly can block new
entrants, slow innovation, and increase prices, all of which
harm consumers.
Conditions That Enable Oligopolies

The conditions that enable oligopolies to exist include high entry

costs in capital expenditures, legal privilege (license to use wireless
spectrum or land for railroads), and a platform that gains value with
more customers (such as social media).

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What Are Some Negative Effects of an Oligopoly?

An oligopoly is when a few companies exert significant control over a given

market. Together, these companies may control prices by colluding with each
other, ultimately providing uncompetitive prices in the market. Among other
detrimental effects of an oligopoly include limiting new entrants in the market
and decreased innovation. Oligopolies have been found in the oil industry,
railroad companies, wireless carriers, and big tech.

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What Is an Example of a Current Oligopoly?

One measure that shows if an oligopoly is present is the

concentration ratio, which calculates the size of companies in
comparison to their industry. Instances where a high concentration
ratio is present include mass media. In the U.S., for example, the
sector is dominated by just five companies: NBC Universal; Walt
Disney; Time Warner; Viacom CBS; and News Corporation—even as
streaming services like Netflix and Amazon Prime begin to encroach
on this market. Meanwhile, within big tech, two companies control
smartphone operating systems: Google Android and Apple iOS.

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