Market Mechanics, Supply & Demand Equilibrium
Market Mechanics and Types
Market
Market: It is the means by which people or groups who wish to acquire a given good (demand) contact others who want to sell it (suppliers) (price). For there to be a market there must be a free market, private ownership of property, the factors of production must be recognized, and there should be laws governing bills of sale and other economic transactions.
What? It produces what people demand.
How? Producing as efficiently as possible, looking at savings in production costs.
Who? For those who can afford it.
Ask and Bid
Ask: Indicates how much of a good or service consumers would be willing to buy at every price level, holding constant the other factors that affect this desire: the price of the good, the prices of related goods, tastes and fashion, and consumer income. The quantity demanded is the amount consumers are willing to buy at each price level.
Bid: Indicates how much of a good or service suppliers would be willing to sell at each price, considering their production costs (prices of production factors, productivity) and business expectations. The quantity supplied is the amount that companies are willing to offer at each price level.
Market Equilibrium and Imbalances
Market Equilibrium: The situation where the price and quantity coincide with the wishes of buyers (applicants) and sellers (bidders).
Oversupply: When the price is above equilibrium, the amount sellers want to sell is more than buyers want to purchase, resulting in unsold goods.
Excess demand: When the price is below equilibrium, the amount sellers want to sell is less than buyers want to purchase while stocks last.
Types of Market Structure
1. Perfect Competition:
- Many small businesses
- Freedom of entry and exit to the market
- The product is homogeneous and undifferentiated
- Competition is complete; companies do not influence the price
- Typical examples: agricultural products (fish markets)
It is the market where consumers are most benefited by low prices and a high amount of goods produced.
2. Imperfect competition: Bidders do have some power and can influence the price of products. According to their suppliers, it includes:
Monopolistic Competition
Monopolistic Competition: Many firms; freedom of entry and exit to the market; products are similar but differ through advertising and branding; there is strong competition; firms have some influence on prices. Examples: appliances and hairdressers.
Oligopoly
Oligopoly: Few companies; they can act in two ways: rivalry or cooperation; strong barriers to entry; products may be similar or differentiated. Two types: a lot of competition (rivalry) or cooperation (no rivalry). Firms have power to influence prices. Examples: finance, banking and oil.
Monopoly
Monopoly: There is a unique company; strong barriers to entry; a single good or service; no competition; the company decides the price and quantity of the product to be sold. Examples: postal service and water. It is the worst kind of market for consumers as prices are higher.