Topic 1 Markets

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Markets

Topic 1



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Topic 1 - Contents

1. Basic economic concepts

2. Market Definitions

3. Characteristics of a market

4. 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 themaximum satisfaction of our (unlimited)

material wants." (Jackson, page 3)



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What is thebasic economic problem?

Providing for people’swants and needs in a

world of scarcity



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What is meant byscarcity ?

The condition in which wantsare forever greater than theavailable supply of time,

goods, and resources(Scarcity should not be confused with poverty )



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What does scarcityforce us to do?

It forces us tomake choices



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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. choosingone thing means leaving the other things.

Rational choice – choices involve weighingup the benefit of an activity against itsopportunity cost.

Opportunity cost refers to the cost of an

activity measured in terms of the bestalternative forgone.



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What are economic

resources?The basic categories of

inputs used toproduce goods and

services



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What are the four

categories of resources?

Land Labor

Capital

Entrepreneurship



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What is aland 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 andservices



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What is capital?

The physical plants,

machinery, and equipmentused to produce other goods



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What is

financial capital?

The money used topurchase capital



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What is

entrepreneurship?

The creative ability of individuals to seek profits bycombining resources to

produce innovative products.



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LandLabor

Capital

Entrepreneurship organizesresources to produce goodsand 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

ProductiveEfficiency

AllocativeEfficiency

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 substitutablegoods 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 Produc t level 2) Selling products to a common group of

buyers in the same geographical area - The Geog raph ic d imens ion –

(international, national, state or local?)

3) Operating on the same Funct ional 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 eachother, and so part of the same market.

and Potential suppliers (or sellers)

Firms that have the ability to quickly andeasily move into supplying these products, if given the incentive.



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Three key characteristics of a market

that influence firms’ behaviour :

Concentration

Product differentiation

Barriers to entry



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3.1 Concentrat ion refers to the number and

size distribution of firms in a market, and

their market shares.

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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3.2 Product Dif ferent iat ion

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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3.3 Barr iers to entry – refers to how difficultit is for a new firm to enter a market andcompete with existing firms.

Types of barriers:

Legal (eg. gov’t regulations, patent rights..)

Technical Financial and economic (eg. economies of

scale)



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4. Basic Market structures

Characteristics Pure

Competition

Monopolistic

Competition

Oligopoly Monopoly

Concentration Large no. of

sellers

Many sellers/

(lowconcentration)

Few sellers/

(highconcentration)

One seller

Product

Differentiation

Homoge.

products

Differentiated

products

Homoge.

or

differentiated

Unique;

no close

substitute

Barriers to

Entry

Low barriers Some barriers High barriers High barriers

or

Blocked



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4.1 Basic Market structures

(Buyer’s side of market) 1. Pure competition: Many buyers; none

is able to influence prices

2. Monopolistic competition: Relativelylarge number of buyers.

3. Oligopsony: Few buyers, who are

independent and able to influence pricesand terms of exchange.

4. 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. It’s 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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Topic 1 Markets