Lecture 2. Market structure: essence and classification

1. The main economic questions and types of economic systems.

2. The definition of market. Function of market. The conditions of market functioning.

3. Classification of markets.

4. Types of markets according market structure.

5. Forms and methods of market competition.

6. Market conjuncture: essence and factors.

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As we know all economic resources are limited. It means that if we spent resources for one good we can’t use it for other good. So, the problem of allocation appears.

Allocation is

To decide this problem any society (economics) has to answer fundamental economic questions:

1. What to produce? The economy has to take a fundamental decision that what goods and services are to be produced.

2. How many to produce? In what quantity should we produce goods and services with the limited resources at our disposal.

3. How to produce? This is the problem of what type of technique is to be adopted for production; an economy may choose between labour intensive technique (use of more labour than capital) and capital intensive technique (use of more capital than labour).

4. When to produce?

5. For whom to produce? The third decision to be taken by an economy is: How to distribute the commodities and services among the different sections of the society?

There are three types of economies:-

1. Capitalist Economy (Free Economy or Market Economy): - A capitalist economy uses the impersonal forces of the market demand and supply or the price mechanism to solve its central problems.

The basic features of a capitalistic economy are as follows:-

1. There is a right of private property. The factors of production are under private ownership.

2. There is a freedom of work; every person is free to choose an engage in an economic activity he likes.

3. The profit motive is most important in the capitalist economy

4. The consumer is the sovereign in a capitalistic economy. A consumer can spend his income where he likes.

5. There exists inequalities of income, some peoples are rich and others are poor. This leads to class struggle.

Ex: USA, England and other countries of West Europe in time of free competition – XVIII-XIX century.

Nowadays no country is purely market.

2. Socialist Economy (Controlled Economy): - A socialist economy solves their central economic problem through Central Planning Authority (Central Planning Commission).

The main features of Socialist Economy are: -

1. The factors of production are collectively owned by the society. These are used by Government in order to maximize the welfare of the society.

2. The right of work is guaranteed by the Government but the choice of occupation is restricted.

3. Since the factors of production are owned by the society the profit motive has no longer importance,

4. Only those goods are produced which are selected by the society, hence the consumers’ sovereignty is restricted.

5. There exists an economical equality.

Ex.: - China and erstwhile U.S.S.R.

Nowadays no country is purely socialist.

3. Mixed Economy: -In a mixed economy a system is developed which tries to include the best features of both capitalist economy and the capitalist economy. It solves the economic problems through both price mechanism and central planning.

The main features of Mixed Economy are: -

1. A dual system of pricing exists

2. State regulates the prices of essential commodities.

Ex.: - Ukraine, USA, France - practically all modern economics

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Market economy is a system in which relations between buyers and sellers are realized through price mechanism. In modern literature there is a big number definition of “market”.

The simplest is: “market is a place where buyers and sellers meet”. But more full definition is: “market is a system of economic relations between buyers and sellers which establish a market price on competitive base.”

The main components of market are: competition, supply, demand and market price.

Functions of market:

1. Harmony of economic wishes of buyers and sellers;

2. Regulative function – leads volume and structure of aggregate demand in accordance to volume and structure of aggregate supply;

3. Controlling function – establishes the main proportions of national production and changes in economic structure;

4. Informative function – gives information about market conjuncture;

5. Motivation function – stimulates productivity growth, efficiency increase, costs decrease, scientific progress introduction, quality improvement;

6. Sanitation function – removes inefficient firms from market.

The main conditions of market appearance and functioning:

1. Private property on means of production (factors of production);

2. Full economic freedom and responsibility for the results of entrepreneur activity;

3. Free price making;

4. Market infrastructure – system of shops, banks, stock and commodity exchanges, insurance companies;

5. Free competition.

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A market can be classified on according different features:

1. By objects of contracts;

2. By area feature;

3. By market structure.

According objects of contracts there are:

1. Markets of goods: means of production and means of consumption;

2. Markets of services: productive and unproductive;

3. Market of capital: money market and securities market;

4. Labour market;

5. Land market;

6. Market of information.

All these markets differ by particularities of market exchange, supply and demand formation, ways of consumption and reproduction and infrastructure.

According area feature there are:

1. Local market;

2. National market;

3. International market.

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According market structure there are:

1. Market of perfect (pure, free) competition;

2. Market of monopolistic competition;

3. Market of oligopoly;

4. Market of monopoly.

Feature	Perfect competition	Monopolistic competition	Oligopoly	Monopoly
Number of firms	Many sellers	Many sellers	Few sellers	One seller
Type of product	Homogeneous	Differentiated	Homogeneous or differentiated	Unique, no close substitutes
Price control	No control	Some control limited by trademark	Depends on interdependence	Total control
Entry and exit conditions	Ease to entry	Relative ease to entry	Barriers to entry	Total barriers to entry
Not price competition	No one	Huge, based on advertisement and trademarks	Huge in the case of differentiated product	Advertisement of social meaning
Examples	Agriculture	Light industry	Heavy industry	Railway

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Competition – is market rivalry between firms for the best conditions of goods and servicers’ production and selling.

Competition can be realized through mechanism of price and not price competition.

Price competition – appears when buyers and sellers try to increase the volume of consumes and sells by changes in its prices.

Not price competition – appears when any legal means of selling increase are used excepting the price.

The main means of not price competition are advertisement, marketing, promotions, innovations, etc.

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Market conjuncture – is situation on the market which characterizes such indicators as supply and demand, level of investments, price dynamics, securities prices, interest rates, etc.

Market conjuncture is changed according different factors, such as: volume of production, volume of storages, dynamics of prices and money incomes, trade and advertisement organization, state laws and economic events, etc.

There are 3 types of market conjuncture: favorable, unfavorable and stable.