Different microeconomic markets

By now, hopefully you can recognise the basics of how demand and supply work, and how they can be used to make decisions on allocating scarce resources. We’re now going to apply them to real markets by swapping some of the assumptions to create a more realistic situation.

Let’s recap some of the assumptions of an ‘ideal’ market structure, which identifies how a market operates allocating scarce resources:

• A market is defined by the nature of the product produced: is it complex or simple? Is it valuable, like a diamond? Are there any other defining physical characteristics?
• The more firms there are in the industry, the greater the competition.
• The degree of power each firm has, and the degree to which the firm can influence price, is dependent on the size of the firm and sharing of information.
• Profit levels are attractive (ie everyone is looking to generate a profit).
• A firm’s behaviour may incorporate pricing strategies, non-price competition, output levels and other methods of market manipulation.
• The extent of barriers to entry and exit of the market can be high, as is the case in transport and logistics.
• All of these factors have an impact on efficiency.

All of these assumptions form the basics of market structures.

Types of market structure

At the microeconomic level, market structures can be thought of as categories along a scale of competitiveness, starting with the purest form of a market, ‘perfect competition’ with many suppliers, and ending with ‘monopoly’, a market of one supplier.

Each of these markets are defined by the following characteristics:

• Number and size of firms that make up the industry or market
• Control over price or output
• Freedom of entry and exit from the industry or market
• Nature of the product
• Degree of homogeneity (similarity) of the products in the industry (ie the extent to which products can be regarded as substitutes for each other)
• The shape of the demand curve and how it incentivises profit

Over the next few steps, we’ll look at these different types of microeceonomic market.

Your task

Do you think any of these markets exist in the real world? Try to find some real examples of each, and discuss them in the comments area.