What is Market, Definition, Essentials & Classification of Market

Mon, 08/01/2011 - 11:00 -- Umar Farooq

What is a Market

In the words of Cournot, French Economist, “Economists understand by the term market not any particular market place in which things are bought and sold but the whole of any region in which buyers and seller’s are in such free inter course with one another that the prices of same goods & services tend to equality easily and quickly”. Thus Market is a real or imaginary place where goods and services are traded.

Essentials of Market

  1. Good or service to be traded.
  2. Buyers and sellers
  3. A place, be it with real boundaries or imaginary (like world market)
  4. Contact between buyers and sellers

Markets, on the basis of goods or services traded between, can be classified as goods or commodity market or it can be factor market for services. However, the popular basis of market structure is the factors that form the environment of market.

Market Environment

The following are the main factors that form the environment of market and the markets are usually classified on the basis of these factors.

  1. The number of buyers and sellers.
  2. The nature of product produced. Whether it is homogenous or differentiated ?
  3. Price elasticity of demand.
  4. Ease of entry into an industry.
  5. Degree of control over price (Regulated or deregulated).

Classification of Market

On the basis of the above, the markets are classified to be

  1. Perfect Competition
  2. Imperfect Competition

1. Perfect Competition

  1. Large no of sellers & buyers number
  2. Homogeneous products perfectly
  3. Free entry and exit.
  4. Perfect knowledge of price cost (no control over price)
  5. Perfectly price elastic demand imperfect competition.

2. Imperfect Competition

  • Monoplistic Competition
  • Oligopoly
  • Monoply

Monopolistic Competition

  1. Large no of sellers and buyers
  2. Differentiated products which are close substitute.
  3. Free entry but firms can produce only close substitutes.
  4. Some control our price.
  5. Less than perfectly price elastic demand.

Oligopoly

  1. Few producers
  2. Homogenous (Pure Oligopoly) and differentiated but close substitutes (Differentiated Oligopoly)
  3. Barriers to entry
  4. Small control (Pure Oligopoly) large control (Differentiated Oligopoly) over price
  5. P.E of D. small (Pure Oligopoly) large (Differentiated Oligopoly)

Monopoly

  1. Single firm
  2. Perfectly differentiated product without close substitute
  3. Very strong barriers to entry
  4. Extreme control over price
  5. Near to in elastic price elasticity of demand

Market Failures

At times, markets fail to deliver optimally and rationally. Resultantly, it starts hurting either buyer or seller of a good or service. The non market forces, (like Government) have to interfere. The idea is to operate on a buffer in order to safeguard the vulnerable strata of the society. Fair prices, taxes, subsidies etc are instruments thus used to encourage production of merit goods and discourage production of non merit goods.

Market Equilibrium

The demand and supply are the market forces that work in opposite direction with equal strength in order to bring the transactors to a bargaining point wherein they make a deal.  The equilibrium in this context is referred to a situation in which demand equals the supply and the market is cleared at a price called equilibrium price.  In free market mechanism, demand and supply are the only factors that determine the equilibrium and the equilibrium price.

Let us suppose, we have a product xfor which Dx is demand curve and Sx is its supply curve. When left alone, they interact and cross each other at point e.  At e Sx=Dx where OP is the price and OQ is the quantity.  The market is said to be in equilibrium as

Quantity demanded = Quantity supplied

OPand OQ are the equilibrium price and equilibrium quantity respectively.

Mathematically

Dx = f(Px)      = law of demand      ( demand for x is function of price of x)

Sx = f(Px)       = law of supply         ( supply of x is function of price of x )

At equilibrium

Dx = Sx =      f(Px)