Basic Market Models in Economics

Definition of Market

• A market is composed of a specific good or service and the buyers and sellers of that good/service.
• This definition highlights necessary conditions for a market's existence.

Market Exchange Complexity

• The method of exchanging goods and services adds complexity to market interactions.
• It's important to start understanding with basic concepts before diving deeper.

Understanding Models and Theories

• A model is a representation of a theory.
• A theory is a formal explanation of observed phenomena that has been verified.
• From observations in the market, explanations lead to the creation of models.

Four Basic Market Models

• The four basic models are:

1. Perfect Competition
2. Monopolistic Competition
3. Oligopoly
4. Monopoly

• Monopolistic Competition and Oligopoly represent the vast majority of real-world markets.
• Pure Monopolies and Perfectly Competitive markets are rare, but serve as important analytical baselines.

Comparison of Market Models

• Market types can be compared based on four characteristics:

1. Number of Firms
2. Product Characteristics
3. Barriers to Entry
4. Market Power

• Number of Firms:
• Pure Monopoly: 1 firm
• Perfect Competition: thousands of firms
• Example of a Pure Monopoly:
• Local electricity company (regulated monopoly)
• Example of Perfectly Competitive Markets:
• Handyman services, lawn care
• Any differences in products can affect market classification.

Product Characteristics

• Three categories will be assumed for product characteristics in comparisons.