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Definition of Market in Economics

Updated on June 7, 2012
Goods & Services in a market
Goods & Services in a market | Source

Terminology

According to the dictionary a market – is an open area, building or event at which people gather to buy and sell goods or food. Yes, like the 'farmers market' or the neighbourhood marketplace where we all head to for movies , shopping and dinner.

But Economics as a subject defines it as - a place where forces of demand and supply operate, and where buyers and sellers interact to trade goods & services in exchange for money or by way of simple barter.

More so markets provide a means by which prices are decided for the traded goods & services, it is also a place where information regarding the goods & services may be obtained. A market is the place where deals, contracts or agreements and transactions are carried out and thus it is the environment which facilitates distribution of goods & services.The market for goods & services is made up of existing and potential customers or buyers who need these goods and services and also who have the ability and willingness to pay for it!

Structures

When a market is observed in its functioning with respect to the type of competition that exists between suppliers in that market, the way various suppliers behave, the manner in which prices are fixed by the suppliers and how new suppliers enter or exit the market we note some distinct types of markets operating in the world.

These distinct characteristics give rise to what we call various market structures.

Some of these prominent market forms or structures are –

Perfect Competition

Monopoly

Oligopoly

Monopolistic Competition

You will notice the differences in these market forms stem from the variations in the number of the buyers and sellers, the size of the buyers and sellers, the type of goods and services that are available for sale in the market and the extent to which information regarding these good and services is freely available and flowing within the market structure.

Let us try to understand these different market forms with examples from the real world.

Perfect Competition

When a product has multiple sellers and buyers and where the product of one seller can easily be substituted by another seller, such a product is called a homogeneous product. Goods in a perfect competition are homogenous in nature and buyers have easy access to all the information regarding the various prices and qualities of the product available in the market. There are no restrictions or barriers to entry for new sellers in such a kind of market. When all these attributes exist, it is called a Perfect Competition market or a Pure Competition market.

The sellers in this market cannot control prices. Since close substitutes are available, if a seller A increases his price, he will be at loss, because the buyer, will simply walk to the next store of seller B that sells a similar product at a lower price. So in such a market form, any seller who tries to hike the price will simply hurt his consumer base.

Such a market structure exists only in theory and not in the real world. But with the growth of e commerce and online selling companies which ship goods globally, we might see some glimpse of such a market coming into effect in the future.


Attributes of a perfect competition or pure competition market
Attributes of a perfect competition or pure competition market | Source

Monopoly

Do you recall Microsoft being in the news back in the early 90s? They were accused of being a Monopoly- that is being the only one or rather a dominant supplier in the market for a particular product. When such a situation arises, the monopolistic seller can control the price and keep it significantly higher than what is determined by market forces. So buyers are at the mercy of such suppliers. So simply defined, a Monopoly is a market structure where only one seller or producer exists. (Microsoft was allowed to continue as is and did not need to split and it is interesting to know that noted economists testified from both sides in the case that ensued between Microsoft and the Government)

Another famous example is the breakup of AT&T back in the early 1980s. The government after initially supporting their endeavour asked them to break up into several smaller companies, as it was argued that they were displaying Monopolistic behaviour and hence were not serving the best interests of the consumers.

All said and done, there is a flip side to this argument (isn’t there always?!) that such monopolies are not always necessarily bad for the consumer, although they might be discouraging for prospective new producers who would like to gain entry into the market.


Attributes of a Monopoly market
Attributes of a Monopoly market | Source

Oligopoly – in such a market structure a small number of sellers produce goods that are somewhat similar in nature. These individual sellers although themselves maybe large firms. These few large sized sellers have a majority of the market share and hence are in way dependent on each other. What one seller decides to do will necessarily impact the actions and policies of the other large firm in the market. Since they exhibit a few characteristics of a Monopoly and some of a Perfect competition; this type of market structure is also considered a mix of Perfect Competition and Monopoly

Example- Banks used to be a great example of Oligopoly but over the years with increased collaborations, tie ups and the advent of internet banking, they have ceased to be an oligopoly. The Airline industry and even the Petroleum sector are other good examples of a group of large firms driving the entire industry.

Firms operating under such market conditions have to be conscious of price behaviour exhibited by other firms. Being a few large players in the same field, any price change by one large seller, effects the price behaviour of the other in a similar fashion. If one firm cuts back on prices, the other needs to follow suit to keep its customer base intact. I am sure most of you must have observed how most auto companies come out with similar offers and deals almost at the same time. This is nothing but a depiction of oligopolistic behaviour.


Monopolistic Competition – This is a market structure that exhibits many sellers and many buyers and each seller is essentially selling the same product but yet attempts to differentiate it from others in certain ways. As you can observe, after reading through the above three market structures, monopolistic competition also falls somewhere in between of perfect competition and monopoly, just like Oligopoly does.

The various sellers try to differentiate their products by modifying the design and look or providing various colour shades or some additional features in a product that is almost the same when stripped down to its basic structure.

Example: The restaurant business- different restaurants serving the same cuisine try and lure more customers by a striking ambience, catchy names or better location or varying menu combinations.

So how does the buyer differentiate between essentially the same product being sold by different sellers? This is where ‘advertising’ in such a type of market structure plays a vital role and of course adds to the cost of doing so. Each seller will need to promote his own good and try and capture a share of the market. This is done either via television, radio or newspaper, flyers and billboards.

Sales & Advertising
Sales & Advertising | Source

If you delve further in this topic, you will find other market structures too such as Duopoly and Monopsony. There is always more to learn!

Back during college days, when we read those fat books on economic theories, the chapter on Markets and their types was one of the many interesting ones. It is another thing; we never scored too high in the exam papers! We blamed it on 'Economics' - not a scoring subject!


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    • profile image

      danielabram 5 years ago

      Very descriptive overview! Thanks for the hub :-)

    • Riverfish24 profile image
      Author

      Riverfish24 5 years ago from United States

      :) Good deal!

    • Simone Smith profile image

      Simone Haruko Smith 5 years ago from San Francisco

      Ah, this is bringing back a bunch of memories from my college economics courses. Thanks for the refresher! Your diagrams are super helpful!

    • Riverfish24 profile image
      Author

      Riverfish24 5 years ago from United States

      Lol, thanks K! yes, I am trying to make my Eco hubs easy to understand for all..

    • krsharp05 profile image

      krsharp05 5 years ago from 18th and Vine

      This is very interesting. I spent a great deal of time enunciating (lol) but I also learned more by reading this article than I did in college econ...I think it has to do with paying attention! Great job Riverfish. -K

    • Riverfish24 profile image
      Author

      Riverfish24 5 years ago from United States

      Thanks tirelesstraveler!

    • tirelesstraveler profile image

      Judy Specht 5 years ago from California

      Economics fascinates me. Nice clear description of markets. Voted up and interesting

    • leahlefler profile image

      Leah Lefler 5 years ago from Western New York

      Riverfish, your diagrams are spectacular and really help me understand the concepts you present. I don't have an economics background, but this is a very clear and easy-to-understand definition of markets!