Market Structure

What is a Market?

• A market is where people who are willing and able to purchase a good, service or resource can carry out an exchange with those who are willing and able to provide that same good, service or resource.
  • Markets can be a physical place, but in economics are generally abstract.
• Markets follow demand and supply.

• There are many kinds of markets:
  • Product markets, goods and services
  • Factor markets (a market for the factors of production), such as labor markets.
  • Financial markets, money being sold and bought, for example currency exchange and loans.
  • Stock markets, such as company stocks and bonds

• No two markets are the same
  • The structure is different in each market.
  • Types of market structure influences how a firm behaves.

Supply in Markets

• In a monopoly there is only one supplier, meaning that they can decide to price. With multiple suppliers, the market price decides the price.
• Monopolies can form naturally when it is most efficient to have only one firm in a market, these are called natural monopolies.
• For example network systems like water or electricity are often natural monopolies as it is very difficult to enter the market, due to having to establish an entire network first.

Pricing in Markets

• There are numerous factors that effect the pricing of markets.

Barriers of Entry

• Requires you to make a large investment or is limited via laws for example.
• This means it is more difficult for new companies to enter a market.
  • For example, it is very hard for new social media apps to enter the market, as people prefer social media sites with more users and content.
    • This leads to a negative feedback loop, where no one wants to use the app as there is no one else to talk to or interact with.

Efficiency

• Having high supply and demand means that a firm is efficient.
• Being inefficient means that the firm will be overtaken by its competition.
• Increased efficiency in a market can often lead to lower prices.
  • For example, plastic kid's toys are often very cheap, as designing and producing them is quite easy.
  • In comparison scale models are far more expensive, as they require more meticulous designing and more expensive production measures.

Competition

• Every market has competition.
• It is influenced by factors such as barriers of entry, the amount of sellers in the market, etc.
• Increased competition generally leads to a lower price.