Markets and market structures

1. What is a market?

Market is any arrangement people have for trading with one another. Markets exist whenever and wherever people come together to buy and sell their goods and services. In modern economic systems consumers and producers exchange their goods and services in many competitive markets.

2. What do economists mean by the market structure?

The conditions under which competition exists in a market refer to a market structure. The market structure is defined in terms of the number and the power of the buyers and sellers, the nature of the product (product differentiation), barriers to entry and exit, and availability of information.

3. What are the principal types of market structures?

The principal kinds of market structures are perfect competition, monopolistic competition, oligopoly, and monopoly.

4. What is perfect competition?

Perfect (or pure) Competition: a market for uniform products in which there are many buyers and sellers, no one of which is big enough to affect the price, and has full knowledge of market conditions.

5. What are the key characteristics of perfect competition?

A large number of buyers and sellers all engaged in the purchase and sale of exactly the same commodity.

Identical commodity offered for sale.

Each buyer or seller has perfect knowledge of market prices and quantities.

There are no barriers to entry or exit.

6. What is monopolistic competition?

Monopolistic Competition: a state of competition in a market in which many firms compete, producing similar but slightly differentiated products.

7. What are the key characteristics of monopolistic competition?

• a large number of firms producing similar but not identical products;

• product differentiation;

• some restrictions of information about market prices and quantities of goods;

• a relatively easy entry to the market.

8. What is product differentiation?

The process of creating uniqueness in products is known as product differentiation. Brand name, color package, location of the seller, customer service, credit conditions, or the smile of the salesperson can differentiate product, even if the products themselves are physically the same. Product differentiation benefits buyers by providing them with a way to distinguish between competing goods as well as sellers by enabling them to increase their market control.

9. What is oligopoly?

Oligopoly: A Few Sellers. Oligopoly is a term applied to markets dominated by a few (roughly three to five) large firms, each with substantial market control. Automobile and computer hardware are examples of industries dominated by oligopolies. Oligopolies exist because it is difficult for competing firms to enter the market.

10. What are the key characteristics of oligopoly?

Oligopoly: A Few Sellers. Oligopoly is a term applied to markets dominated by a few (roughly three to five) large firms, each with substantial market control. Automobile and computer hardware are examples of industries dominated by oligopolies. The high cost of entry is one reason why some industries remain in the hands of a few sellers. Price competition is less effective where there is oligopoly. Competing firms cannot enter some industries unless they pay the patent holders for permission to use the process or find a new method of production not protected by existing patents.