Markets Topic 09/26/15 Topic - Contents 1. Basic economic concepts 2. Market Definitions 3. Characteristics of a market 4. Basic market structures 09/26/15 1. Definition of economics "Economics is concerned with the efficient use of LIMITED productive resources for the purposes of attaining the maximum satisfaction of our (unlimited) material wants." (Jackson, page 3) 09/26/15 What is the basic economic problem? Providing for people’s wants and needs in a world of scarcity What is meant by scarcity? The condition in which wants are forever greater than the available supply of time, goods, and resources (Scarcity should not be confused with poverty) What does scarcity force us to do? It forces us to make choices 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? 09/26/15 Choice and Opportunity Cost    Choice involves sacrifice., i.e. choosing one thing means leaving the other things. Rational choice – choices involve weighing up the benefit of an activity against its opportunity cost. Opportunity cost refers to the cost of an activity measured in terms of the best alternative forgone. 09/26/15 What are economic resources? The basic categories of inputs used to produce goods and services What are the four categories of resources?     Land Labor Capital Entrepreneurship 10 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. 09/26/15 17 Economic Efficiency Economic Efficiency Productive Efficiency Allocative Efficiency To produce at the least possible cost To produce the most Desired products Making stuff right Making the right stuff 09/26/15 18 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) 09/26/15 19 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 ?? 09/26/15 20 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 substitutable goods to a common group of buyers.  Two main elements of this definition:  Demand substitutability  Supply substitutability 09/26/15 21 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. 09/26/15 22 2.2 Elements of Demand substitutability A market includes firms: 1) Selling products that are closely substitutable in the consumers’ eyes - The Product level 2) Selling products to a common group of buyers in the same geographical area - The Geographic dimension – (international, national, state or local?) 3) Operating on the same Functional level – ie. manufacturing, wholesale or retail 09/26/15 23 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 each other, and so part of the same market.  and Potential suppliers (or sellers)  Firms that have the ability to quickly and easily move into supplying these products, if given the incentive. 09/26/15 24 3. Characteristics of a market  Three key characteristics of a market that influence firms’ behaviour: Concentration  Product differentiation  Barriers to entry  09/26/15 25 3. Characteristics of a market 3.1 Concentration refers to the number and size distribution of firms in a market, and their market shares.   09/26/15 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 26 3. Characteristics of a market 3.2 Product Differentiation    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 ?? 09/26/15 27 3. Characteristics of a market 3.3 Barriers to entry – refers to how difficult it is for a new firm to enter a market and compete with existing firms. Types of barriers:    09/26/15 Legal (eg. gov’t regulations, patent rights ) Technical Financial and economic (eg. economies of scale) 28 4. Basic Market structures Characteristics Pure Monopolistic Competition Competition Concentration Large no. of Many sellers/ Few sellers/ One seller sellers (low (high concentration) concentration) Product Differentiation Homoge. products Barriers to Entry Low barriers Some barriers High barriers 09/26/15 Differentiated products Oligopoly Monopoly Homoge. or differentiated 29 Unique; no close substitute High barriers or Blocked 4.1 Basic Market structures (Buyer’s side of market) 1. Pure competition: Many buyers; none is able to influence prices 2. Monopolistic competition: Relatively large number of buyers. 3. Oligopsony: Few buyers, who are independent and able to influence prices and terms of exchange. 4. Monopsony: One buyer 09/26/15 30 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 09/26/15 31 Market Conduct Basic Conditions Location, endownment of raw materials, technology, gov’t regulations Market Structure Perfect competition, Monopolistic Competition, Oligopoly, Monopoly Market Conduct Market Performance 09/26/15 How firms behave? (ie. their policies re. price setting, product range, cooperation with rivals, advertising, research, innovation Efficient use of resources, social implications, equity (or fairness) 32 [...]... moon, etc 11 What is labor? The mental and physical capacity of workers to produce goods and services 12 What is capital? The physical plants, machinery, and equipment used to produce other goods 13 What is financial capital? The money used to purchase capital 14 What is entrepreneurship? The creative ability of individuals to seek profits by combining resources to produce innovative products 15 Land... the right stuff 09/26 /15 18 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 ) 09/26 /15 19 2 Markets  Broad Definition:... one another (Jackson p.55)  Examples ?? 09/26 /15 20 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 substitutable goods to a common group of buyers  Two main elements of this definition:  Demand substitutability  Supply substitutability 09/26 /15 21 2 .1 Usefulness of Market Definition  Market definition... organizes Entrepreneurship resourcesto produce goods to produce goods resources andservices services and 16 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 09/26 /15 17 Economic Efficiency Economic Efficiency Productive Efficiency Allocative Efficiency To produce at... characteristics of a market that influence firms’ behaviour: Concentration  Product differentiation  Barriers to entry  09/26 /15 25 3 Characteristics of a market 3 .1 Concentration refers to the number and size distribution of firms in a market, and their market shares   09/26 /15 High concentration - a small number of firms control a large market share Low concentration – a large number of firms and... concentration) Product Differentiation Homoge products Barriers to Entry Low barriers Some barriers High barriers 09/26 /15 Differentiated products Oligopoly Monopoly Homoge or differentiated 29 Unique; no close substitute High barriers or Blocked 4 .1 Basic Market structures (Buyer’s side of market) 1 Pure competition: Many buyers; none is able to influence prices 2 Monopolistic competition: Relatively large... prices and terms of exchange 4 Monopsony: One buyer 09/26 /15 30 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 09/26 /15 31 Market Conduct Basic Conditions Location, endownment... from other similar products Examples of homogeneous (or standardised) and differentiated products ?? 09/26 /15 27 3 Characteristics of a market 3.3 Barriers to entry – refers to how difficult it is for a new firm to enter a market and compete with existing firms Types of barriers:    09/26 /15 Legal (eg gov’t regulations, patent rights ) Technical Financial and economic (eg economies of scale) 28... 09/26 /15 23 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 each other, and so part of the same market  and Potential suppliers (or sellers)  Firms that have the ability to quickly and easily move into supplying these products, if given the incentive 09/26 /15 ... are competing  This will help management to make informed decisions about:  Product pricing  Any new product lines  Advertising strategy  Investment  Etc 09/26 /15 22 2.2 Elements of Demand substitutability A market includes firms: 1) Selling products that are closely substitutable in the consumers’ eyes - The Product level 2) Selling products to a common group of buyers in the same geographical . 09/26 /15 1 Markets Topic 1 2 09/26 /15 Topic 1 - Contents 1. Basic economic concepts 2. Market Definitions 3. Characteristics of a market 4. Basic market structures 3 09/26 /15 1. Definition. of inputs used to produce goods and services 10 What are the four categories of resources?  Land  Labor  Capital  Entrepreneurship 11 What is a land resource? Any natural resource. products. 16 Land Land Labor Labor Capital Capital Entrepreneurship organizes resources to produce goods and services Entrepreneurship organizes resources to produce goods and services 17 09/26 /15 What