A Brief Note on the Theory of Market

Individuals can freely exchange goods and services based on prices in the market system, even if they don’t know each other. For example, the cup of coffee you drink in the morning was carried to you by thousands of strangers who grew, harvested, processed, produced, packaged, shipped, stocked, and sold things along the route.

The goal of this reading is to help you grasp the significance of market structure. Understanding market structure is a key tool in examining issues such as a firm’s pricing of its products and, more broadly, its potential to boost profitability, because different market structures result in distinct sets of choices facing a firm’s decision-makers.

Market Definition:

In economics, a market is a coordinating mechanism that uses prices to convey information among economic entities (such as firms, households and individuals) to regulate production and distribution.

Other definitions are:

• According to Jevons – “Originally a market was a public place in a town where provision and other objects were exposed for sale, but the word has been generalized so as to mean anybody or persons, who are in intimate business relation and carry on the extensive transaction in any commodity.
• As Chapman has said – “The term market refers not necessarily to a place but always to commodity or commodities and the buyers and sellers of the same who are in direct competition with each other.”

Features of a market:

• Markets enable the distribution and allocation of resources in a community and facilitate trade
• Any tradeable item can be examined and priced in a market
• A market can evolve more or less organically or be purposefully established by human interaction in order to facilitate the exchange of rights (cf. ownership) of services and goods
• Markets mostly replace gift economies, and they are frequently maintained by laws and conventions such as a booth fee, competitive pricing, and a source of items for sale (local produce or stock registration)
• Demand and supply, pricing, market information between sellers and buyers, and legal control and laws to assure a fair price are all factors that influence the exchange process
• The two sides of the market are buyers (demand) and sellers (supply)
• The market’s requirements are people’s needs, their ability to spend money, their willingness to part with money, and the availability of goods and services

Market Structure:

In economics, market structure describes how enterprises are distinguished and classified depending on the sorts of goods they sell (homogeneous/heterogeneous) and how external events and elements affect their operations. The peculiarities of various marketplaces are easier to grasp thanks to market structure.

Types of Market Structure:

• Perfect competition is a market in which there are many buyers and sellers, with no entry barriers, dealing with homogeneous products with no distinction, and where the market sets the price. Agricultural items, for example, have a large number of customers and sellers

• Monopolistic competition is a sort of imperfect competition in which multiple vendors compete for products that are similar but differ from one another (for example, product quality may differ) and hence are not ideal replacements. For instance, toothpaste, soft drinks, and apparel are all homogeneous products with a large number of customers and suppliers

• An oligopoly is a market structure in which a small number of companies control the majority of the market share. Price takers and makers are not the same things. Price rigidity is a common strategy used by businesses to avoid price wars. They keep a careful eye on their competitors’ rates and adjust their own accordingly

• Monopoly refers to a situation in which there is only one seller of a product or service with no substitute. Because they control the industry, the corporation is the price maker. There are significant entry obstacles. Monopoly power, according to Frank Fisher, a well-known antitrust economist, is “the ability to behave in an unrestricted manner,” such as raising prices or lowering quality. Standard Oil is an example

Conclusion:

The theory of markets is more precisely concerned with determining the prices and outputs of goods and services, as well as the pricing and use of inputs of production.

The forces associated with the market structure within which a corporation works will determine its profitability in the long run. In a highly competitive market, the forces of competition will drive down long-term profitability. Even in less competitive marketplaces, huge gains can be made over time; in the short run, anything can happen. As a result, knowing the forces that shape market structure can help a financial analyst assess a company’s short- and long-term prospects.