Ch. 5: When Buyers & Sellers Interact - How Markets Work

What is a Market?

• A market is not a physical place but the interaction between buyers and sellers where they exchange information, negotiate, and transact.

• Key Idea: Markets are about activities, not locations (e.g., online shopping, housing market, classified ads).

→ Example: The internet is a market—buyers compare prices and features; sellers use websites and social media to attract customers.

How are prices set in a market?

• Prices are set through negotiation between buyers and sellers.

• Sellers aim to maximize revenue.

• Buyers aim to get the best deal.

• Market Price: The prevailing price agreed upon by buyers and sellers at a given time.

Advantages of a market based economy

• Entrepreneurs are ENCOURAGED to start a Business.

• Consumers have CHOICES of Suppliers and Alternatives.

• Sellers are entitled to (try to) make a PROFIT.

• When Buyers and Sellers Negotiate and Agree, both parties get what they want☺

Target Market

A specific group of people with shared characteristics (age, income, location, etc.) who are most likely to buy a product.

Types of Market Structure - Perfect Competition

• Features:

  • Many small sellers

  • Identical products

  • No barriers to entry

  • Sellers have small market share

  • Prices are nearly identical

• Buyer Power: High—lots of choice

• Examples: Milk, tomatoes at a farmer’s market, used textbooks

(Perfect Competition is a market structure characterized by a very large number of small sellers all selling identical (homogeneous) products.)

Type of Market Structure - Oligopoly

• Features:

  • Few large sellers

  • High barriers to entry (cost, technology, scale)

  • Sellers are aware of each other and often match prices

• Buyer Power: Limited—few choices

• Barriers to Exit: Also high—expensive to leave the market

• Examples: Airlines, banks, cell service providers

(Oligopoly is a market structure dominated by a small number of large and interdependent firms. These few sellers control the majority of the market share.)

Type of Market Structure - Monopoly

• Features:

  • Only one seller

  • No competition

  • Buyer must accept seller’s terms or go without

• Types:

  • Natural Monopoly: One firm is more efficient (e.g., utilities)

  • Legislated Monopoly: Government grants exclusive rights (e.g., LCBO, cable providers)

• Examples: LCBO, Rogers Cable, Maple Leafs games

(Monopoly is a market structure where there is only one seller of a unique product or service, with no close substitutes.)

Monopolistic Competition

• Features:

  • Many sellers, but a few are large and well-known

  • Low barriers to entry

  • Differentiation: Sellers make products seem unique (via branding, logos, etc.)

  • Branding: Helps build customer loyalty and justify higher prices

• Examples: Coffee shops (Starbucks vs. local shops), fast food, sportswear (Nike vs. no-name brands)

(Monopolistic Competition is a market structure with many sellers, but where some firms are able to differentiate their products through branding, making them seem unique.)

Barriers to Entry

• Something that makes it hard to enter a market (e.g., high cost, technology, economies of scale).

Barrier to Exit

• Something that makes it hard to leave a market (e.g., contracts, employee layoffs, asset sales).

Market Price

• The current agreed-upon price.

Market Share

A firm’s sales as a percentage of total market sales.

Target Market

Specific customer group a business aims to serve.

Differentiation

• Making a product seem different or better.

Branding

Using names, logos, etc., to stand out

Economies of Scale

• Cost advantages from large-scale production.