A Comparison of Various Market Structures

Structure Characteristics	Monopoly	Oligopoly	Monopolistic competition	Perfect competition
Number of firms	1	Few	Many	Almost infinite
Pricing decisions	MC=MR	Strategic pricing, between monopoly and perfect competition	MC=MR	MC-MR=P
Output decisions	Most output restriction	Output somewhat restricted	Output restricted somewhat by product	No output restriction
Interdependence	Only firm in market, not concerned about competitors	Independent strategic pricing and output decision	Each firm acts independently	Each firm acts independently
Profit	Possibly of long-run economic profit	Some long-run economic profit possible	No long-run economic profit possible	No long-run economic profit possible

Lecture 10. Money, banking and financial sector

1. Financial sector.

2. The definition and functions of money.

1. Financial sector

Financial institutions are central to almost all macro-economic debates.

The financial sector – the market for creation; and exchange of financial assets such as money, stocks, and bonds – plays a central role in organizing and coordinating our economy; it makes modern economic society possible.

Institutions and financial markets

To understand the financial sector and its relation to the real sector, you must understand how financial assets and liabilities work and how they affect the real economy.

An asset is something that provides its owner with expected future benefits. There are two types of assets: real assets and financial assets.

Real assets are assets such as houses or machinery whose services provide direct benefits to their owners, either now or in the future. A house is a real asset – you can live in it. A machine is a real asset – you can produce goods with it.

Financial assets are assets, such as stocks or bonds, whose benefit to the owner depends on the issuer of the asset meeting certain obligations.

Financial liabilities are liabilities incurred by the issuer of a financial asset to stand behind the issued asset.

It's important to remember that every financial asset has a corresponding financial liability; it's that financial liability that gives the financial asset its value. In the case of bonds, for example, a company's agreement to pay interest and repay the principal gives bonds their value. If the company goes bankrupt and reneges on its liability to pay interest and repay the principal, the asset becomes worthless. The corresponding liability gives the financial asset its value.

Financial institutions

A financial institution is a business whose primary activity is buying, selling, or holding financial assets.

For example, some financial institutions (depository institutions and investment intermediaries) sell promises to pay in the future. These promises can be their own promises or someone else's promises. When you open a savings account at a bank, the bank is selling you its own promise that you can withdraw your money, plus interest, at some unspecified time in the future.

Such a bank is a depository institution – a financial institution whose primary financial liability is deposits in checking or savings accounts. When you buy a newly issued government bond or security from a securities firm, it's also selling you a promise to pay in the future. But in this case, it's a third party's promise. So a securities firm is a financial broker that sells third parties' promises to pay. It's a type of marketing firm for financial IOUs.

As economists use the term, to save is to buy a financial asset.

To invest (in economic terminology) is to buy real, not financial, assets that you hope will yield a return in the future. How do you get funds to invest if you don't already have them? You borrow them. That means you create a financial asset that you sell to someone else who saves.