Markets

Topic 1

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Topic 1 - Contents
1.
2.
3.
4.

Basic economic concepts

Market Definitions
Characteristics of a market
Basic market structures

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1. Definition of economics
"Economics is concerned with the
efficient use of LIMITED productive
resources for the purposes of attaining the
maximum satisfaction of our (unlimited)
material wants." (Jackson, page 3)

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What is the
basic economic problem?
Providing for peoples
wants and needs in a
world of scarcity
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What is meant by
scarcity?
The condition in which wants are
forever greater than the
available supply of time,
goods, and resources
(Scarcity should not be confused with
poverty)
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What does scarcity

force us to do?
It forces us to
make choices

Basic Economic Questions

Limited
resources

Unlimited needs and

wants
Scarcity

=> Choices must be made about:

What to produce?

How much to produce?

For whom to produce?
At what price to sell?
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Choice and Opportunity Cost

Choice involves sacrifice., i.e. choosing
one thing means leaving the other things.
Rational choice choices involve
weighing up the benefit of an activity
against its opportunity cost.
Opportunity cost refers to the cost of an
activity measured in terms of the best
alternative forgone.

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What are economic

resources?
The basic categories of
inputs used to
produce goods and
services
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What are the four

categories of resources?

Land
Labor
Capital
Entrepreneurship
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What is a
land resource?
Any natural resource provided
by nature.
Land

includes anything natural above

and below the ground such as forests,
gold, diamond, oil, rivers, lakes, seas,
air, the sun, the moon, etc.
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What is labor?
The mental and physical capacity
of workers to produce goods and
services

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What is capital?
The physical plants,
machinery, and equipment
used to produce other
goods

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What is
financial capital?
The money used to
purchase capital

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What is
entrepreneurship?
The creative ability of
individuals to seek profits by
combining resources to
produce innovative products.
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Land
Land

Labor
Labor

Capital
Capital

Entrepreneurship
organizes
Entrepreneurship organizes
resources
to
produce
goods
resources to produce goods
and
services
and services
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What economics is all about?

It is the study of how society chooses to

allocate its scarce resources to the
production of goods and services in order
to satisfy unlimited needs and wants.

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Economic Efficiency
Economic
Efficiency
Productive
Efficiency

Allocative
Efficiency

To produce at the
least possible cost

To produce the most

Desired products

Making stuff right

Making the right stuff

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Economics an overview

Macroeconomics deals with this problem at the

aggregate level. It focuses on the economy as a
whole ie. the big picture

Microeconomics deals with the problem at the

level of individual units within the economy such
as consumers, firms etc.
In microeconomics we examine the tree, not the
forest (Jackson p.10)

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2. Markets

Broad Definition:
A mechanism

or arrangement that brings

buyers and sellers of a good or service in
contact with one another (Jackson p.55)

Examples ??

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2. Markets

Definition of a specific market:

A market includes all sellers who are in,
or potentially in, competition with each
other; who sell closely substitutable
goods to a common group of buyers.

Two main elements of this definition:

Demand

substitutability
Supply substitutability
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2.1 Usefulness of Market Definition

Market definition helps firms to know who its

competitors are, what they are doing and for
whose business they are competing.

This will help management to make informed

decisions about:
Product

pricing
Any new product lines
Advertising strategy
Investment
Etc.
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2.2 Elements of Demand substitutability

A market includes firms:
1) Selling products that are closely
substitutable in the consumers eyes The Product level
2) Selling products to a common group of
buyers in the same geographical area The Geographic dimension
(international, national, state or local?)
3) Operating on the same Functional level
ie. manufacturing, wholesale or retail
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2.3 Elements of Supply substitutability

Definition of a market includes both:
Current suppliers (or sellers)
Firms

currently selling products that are

considered to be close substitutes for each
other, and so part of the same market.

and Potential suppliers (or sellers)

Firms

that have the ability to quickly and

easily move into supplying these products, if
given the incentive.

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3. Characteristics of a market

Three key characteristics of a market

that influence firms behaviour:
Concentration
Product differentiation
Barriers to entry

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3. Characteristics of a market
3.1 Concentration refers to the number and
size distribution of firms in a market, and
their market shares.

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High concentration - a small number of

firms control a large market share
Low concentration a large number of
firms and no firms have any market power

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3. Characteristics of a market
3.2 Product Differentiation

Physical or subjective differences in

consumers minds between rival firms
products.
A feature of a product that sets it apart from
other similar products.

Examples of homogeneous (or standardised)

and differentiated products ??

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3. Characteristics of a market
3.3 Barriers to entry refers to how difficult
it is for a new firm to enter a market and
compete with existing firms.
Types of barriers:

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Legal (eg. govt regulations, patent rights..)

Technical
Financial and economic (eg. economies of
scale)
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4. Basic Market structures

Characteristics

Pure
Monopolistic
Competition Competition

Concentration

Large no. of Many sellers/ Few sellers/

One seller
sellers
(low
(high
concentration) concentration)

Product
Differentiation

Homoge.
products

Barriers to
Entry

Low barriers Some barriers High barriers

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Differentiated
products

Oligopoly

Monopoly

Homoge.
or
differentiated

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Unique;
no close
substitute
High barriers
or
Blocked

4.1 Basic Market structures

(Buyers side of market)
1.
2.
3.

4.

Pure competition: Many buyers; none

is able to influence prices
Monopolistic competition: Relatively
large number of buyers.
Oligopsony: Few buyers, who are
independent and able to influence prices
and terms of exchange.
Monopsony: One buyer

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4.2 Problems with Classifying

structure

In practice, it is often difficult to fit a market into

one category or another. Its a matter of
judgment. No hard and fast rules.
Different aspects of a market may fit into
different categories.
Market structures are changing over time

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Market Conduct
Basic Conditions

Location, endownment of raw materials,

technology, govt regulations

Market Structure

Perfect competition, Monopolistic

Competition, Oligopoly, Monopoly

Market Conduct

How do firms behave? (ie. their policies re.

price setting, product range, cooperation
with rivals, advertising, research, innovation

Market Performance

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Efficient use of resources, social

implications, equity (or fairness)
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