3.1: The Ideal Market

Pages 81-83

the market

the total supply and demand for a particular product

how do we distinguish different market structures?

1. the number of competitors in the market

2. the type of market

distinguishing different market structures - one supplier

monopoly

distinguishing different market structures - two suppliers

duopoly

distinguishing different market structures - few suppliers

oligopoly

distinguishing different market structures - a lot of suppliers

perfect competition / monopolistic

what is the number of competitors determined by?

barriers to entry

distinguishing different market structures - homogenous product

standardised products from different consumers that are perceived by consumers as virtually identical

e.g. gasoline, wheat, gold

distinguishing different market structures - heterogeneous product

products of different providers are perceived by consumers as clearly different

e.g. clothing, restaurants, soft drinks

3 conditions of the ideal market

1. buyers and sellers have no market power - cannot impact the market conditions or steer it for leverage

2. goods and services are private goods and there’s no externalities - you can only consume it if you pay for it, you lose it once it’s consumed (e.g. a burger)

3. buyers and sellers have the same information about the goods and services (symmetric)

features of a perfectly competitive market

• market atomism - there are many buyers and sellers

  • each supplier is so small compared to the market that they have negligible influence on the price (price takers)

• a homogeneous product is supplied

  • products are perceived as identical by the consumer, so the consumer only looks at the price

perfectly competitive market - example

milk - each milk producer has little to no control over the price of milk because other sellers offer virtually identical milk (price takers)

you cannot impact the market by varying consumption or production

non-competitive market - example

telecom market - small number of suppliers = each supplier is sufficiently large to influence the market price (price makers)

you can impact the market by varying consumption or production