Text j competiton and market structures

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1. Economists classify markets according to conditions that prevail in them.

2. Buyers and sellers deal in different products.

3. Buyers and sellers must be well – informed about items for sale.

4. Sellers keep their own prices high to attract customers.

5. Laissez – faire is a French term that means «allows them to do».

6. Five major conditions characterize purely competitive markets.

7. There are five different market structures.

8. There is no product differentiation.

Product Differentiation. Name a popular brand of shoes or clothing that you simply must have. Can you name several competing brands that you consider to be poor substitutes? If so, product differentiation exists—and you will pay more because of it.

When Adam Smith published An Inquiry into the Nature and Causes of the Wealth of Nations in 1776, the average factory was small, and most business was competitive. Laissez-faire, the philosophy that government should not interfere with commerce, or trade, dominated Smith's writing. Laissez-faire is a French term that means "allow them to do." Under laissez-faire, the role of government is confined to protecting private property, enforcing contracts, settling disputes, and protecting businesses against foreign goods.

By the late 1800s, however, competition was weakening. In some markets, a series of mergers combined many small firms into a few very large businesses. As industries developed— industry meaning the supply side of the market, or all producers collectively—the nature of competitive markets changed.

Today, economists classify markets according to conditions that prevail in them. They ask questions such as: How many suppliers are there? How large is each supplier? Do the firms have any influence over price? How much competition exists between firms? What kind of economic product is involved? Are all firms in the market selling exactly the same product, or simply similar ones? Is it easy or difficult for new firms to enter the market?

The answers to these questions help determine mar­ket structure, or the nature and degree of competition among firms operating in the same industry. Markets are classified according to certain structural character­istics, and economists have names for these different market structures—pure competition, monopolistic competition, oligopoly, and monopoly.

Pure Competition

An important type of market structure is pure competition. This market situation includes indepen­dent and well-informed buyers and sellers of exactly the same economic product. Five major conditions characterize purely competitive markets.

Conditions for Pure Competition

The first condition is that a large number of buyers and sellers exist. No single buyer or seller is large enough or powerful enough to affect the price of the product.

The second condition is that buyers and sellers deal in identical products. Buyers do not prefer one seller's - merchandise over another's. No difference in quality, no brand names, and no need to advertise exist.

The third condition is that each buyer and seller acts independently. As long as everyone acts indepen­dently, sellers compete against one another for the consumer's dollar. Buyers also compete against each other and against the seller to obtain the best price. The competition between buyers and sellers is one of the forces that keeps prices low.

The fourth condition is that buyers and sellers be reasonably well - informed about items for sale. If a store offered an item for sale at a low price, customers would know about it. Because all products are exactly the same, customers would have little reason to remain loyal to one seller. If sellers were reasonably well - informed of other sellers' prices, they would have to keep their own prices low to attract customers.

The fifth condition of a purely competitive market is that buyers and sellers be free to enter into, con­duct, or get out of business. This freedom makes it difficult for a single producer in any industry to keep the market just to itself. Producers have to keep prices competitive, or new firms will enter the industry and take away some of their business.