vWhat is a Market?

When we talk about a market, we generally visualize a crowded place with a lot of consumers and a few shops.
People are buying various goods like groceries, clothing, electronics, etc., and the shops are also selling a variety of
products and services as well. So, in a traditional sense, a market is where buyers and seller meet to exchange goods
and services.

But what is a market in economics? In economics, we do not refer to a market as a physical place. Economists will
describe a market as coming together of the buyers and sellers, i.e., an arrangement where buyers and sellers come
in direct or indirect contact to sell/buy goods and services.

For example, the market for mobile will constitute all the sellers and buyers of mobile phones in an economy. It does
not necessarily refer to a geographic location.

Let us then list a few features of a market,

 In economics, the term market will refer to the market for one commodity or a set of commodities. For
example, a market for coffee, a market for rice, a market for TV’s, etc.

 A market is also not restricted to one physical or geographical location. It covers a general wide area and the
demand and supply forces of the region.

 There must be a group of buyers and sellers of the commodity to constitute a market. And
the relations between these sellers and buyers must be business relations.

 Both the sellers and buyers must have access to knowledge about the market. There should be an awareness
of the demand for products, consumer choices, and preferences, fashion trends, etc.

 At any given time only one price can be prevalent in the market for the goods and services. This is only
possible in the existence of perfect competition.

Classification of Markets

Broadly there are two classifications of markets – the product market and the factor market. The factor market refers
to the market for the buying and selling of factors of production like land, capital, labour, etc. The other classification
of markets are as follows,

On the Basis of Geographic Location

 Local Markets: In such a market the buyers and sellers are limited to the local region or area. They usually
sell perishable goods of daily use since the transport of such goods can be expensive.

 Regional Markets: These markets cover a wider area than local markets like a district, or a cluster of few
smaller states

 National Market: This is when the demand for the goods is limited to one specific country. Or the
government may not allow the trade of such goods outside national boundaries.

 International Market: When the demand for the product is international and the goods are also traded
internationally in bulk quantities, we call it an international market.

On the Basis of Time

 Very Short Period Market: This is when the supply of the goods is fixed, and it cannot be changed
instantaneously. Say for example the market for flowers, vegetables, fruits etc. The price of goods will
depend on demand.

 Short Period Market: The market is slightly longer than the previous one. Here the supply can be slightly
adjusted.
  Long Period Market: Here the supply can be changed easily by scaling production. So, it can change
according to the demand of the market. So the market will determine its equilibrium price in time.

On the Basis of Nature of Transaction

 Spot Market: This is where spot transactions occur, that is the money is paid immediately. There is no system
of credit

 Future Market: This is where the transactions are credit transactions. There is a promise to pay the
consideration sometime in the future.

On the Basis of Regulation

 Regulated Market: In such a market there is some oversight by appropriate government authorities. This is
to ensure there are no unfair trade practices in the market. Such markets may refer to a product or even a
group of products. For example, the stock market is a highly regulated market.

 Unregulated Market: This is an absolutely free market. There is no oversight or regulation, the market forces
decide everything

Types of Market Structures

A variety of market structures will characterize an economy. Such market structures essentially refer to the degree of
competition in a market.

There are other determinants of market structures such as the nature of the goods and products, the number of
sellers, number of consumers, the nature of the product or service, economies of scale etc. We will discuss the four
basic types of market structures in any economy.

One thing to remember is that not all these types of market structures actually exist. Some of them are just
theoretical concepts. But they help us understand the principles behind the classification of market structures.
1] Perfect Competition

In a perfect competition market structure, there are a large number of buyers and sellers. All the sellers of the market
are small sellers in competition with each other. There is no one big seller with any significant influence on the
market. So, all the firms in such a market are price takers.

There are certain assumptions when discussing the perfect competition. This is the reason a perfect
competition market is pretty much a theoretical concept. These assumptions are as follows,

 The products on the market are homogeneous, i.e., they are completely identical

 All firms only have the motive of profit maximization

 There is free entry and exit from the market, i.e., there are no barriers

 And there is no concept of consumer preference

What is a Perfectly Competitive Market?

Before we look at the features, look at the following example: You go to a vegetable market and inquire about the
price of tomatoes from a shopkeeper. He quotes Rs. 5 per kg. You go to a few more shops and enquire from many
shopkeepers. They all quote the same rate. Based on this, you make the following observations:

1. There are many buyers and sellers in the tomatoes market

2. All shopkeepers are selling tomatoes at Rs. 5 per kg.

3. There is product homogeneity. This means that all tomatoes appear to the same and you are unable to
distinguish one from the other. This is an example of a perfectly competitive market.

Features of Perfect Competition

An essential aspect of perfect competition is the absence of any monopolistic element. These are the three essential
features of perfect competition:

1. The number of buyers and sellers in the market is very large. These buyers and sellers compete among
themselves. Due to the large number, no buyer or seller influences the demand or supply in the market.

2. The commodity sold or bought is homogeneous. In other words, goods produced by different firms are
identical in nature.

3. Firms can enter or exit the market freely.

Apart from these essential features, there are some more conditions attached to the perfect competition.

Additional Features of Perfect Competition

a. Buyers and Sellers have a perfect knowledge of:

i. The quantities of stock of goods in the market

ii. The conditions of the market

iii. Prices at which transactions of sale or purchase are happening.

b. There are facilities that help the movement of goods from one centre to another.

c. Buyers have no preference between different sellers.

d. Also, buyers have no preference between different units of the commodity offered for sale.

e. Sellers have no preference between different buyers.

 f. At any given point in time, the goods are bought or sold at a uniform price. In other words, all firms must
accept the price determined by the market forces to total demand and supply.

When a market operates under the condition of perfect competition, buyers and sellers have perfect knowledge and
perfect mobility. Therefore, if a seller tries to raise the price above that charged by others, he loses customers. The
stock market is a great example of perfect competition.

2] Monopolistic Competition

In monopolistic competition, the market has features of both perfect competition and monopoly. A monopolistic
competition is more common than pure competition or pure monopoly. In this article, we will understand
monopolistic competition and look at the features, price-output determination, and conditions for equilibrium.

This is a more realistic scenario that actually occurs in the real world. In monopolistic competition, there are still a
large number of buyers as well as sellers. But they all do not sell homogeneous products. The products are similar
but all sellers sell slightly differentiated products.

Now the consumers have the preference of choosing one product over another. The sellers can also charge a
marginally higher price since they may enjoy some market power. So, the sellers become the price setters to a certain
extent.

For example, the market for cereals is a monopolistic competition. The products are all similar but slightly
differentiated in terms of taste and flavours. Another such example is toothpaste.

3] Oligopoly

The word Oligopoly is derived from two Greek words – ‘Oligi’ meaning ‘few’ and ‘Polein’ meaning ‘to sell’. In
an oligopoly, there are only a few firms in the market. While there is no clarity about the number of firms, 3-5
dominant firms are considered the norm. In other words, oligopoly is defined as a market structure with a small
number of firms, none of which can keep the others from having significant influence. So, in the case of an oligopoly,
the buyers are far greater than the sellers. Also, as there are few sellers in the market, every seller influences the
behaviour of the other firms and other firms influence it.

The firms in this case either compete with another to collaborate together, they use their market influence to set the
prices and in turn maximize their profits. So, the consumers become the price takers. In an oligopoly, there are
various barriers to entry in the market, and new firms find it difficult to establish themselves.

4] Monopoly

The term monopoly means a single seller (mono = single and poly = seller). In economics, a monopoly refers to a firm
which has a product without any substitute in the market. Therefore, for all practical purposes, it is a single-
firm industry and the single firm will control the entire market. It can set any price it wishes since it has all the market
power. Consumers do not have any alternative and must pay the price set by the seller.

Monopolies are extremely undesirable. Here, the consumers lose all their power and market forces become
irrelevant. However, a pure monopoly is very rare in reality

Monopoly definition by Prof. A.J. Braff – ‘Under pure monopoly, there is a single seller in the market. The
monopolist’s demand is the market demand. The monopolist is a price maker. Pure monopoly suggests a no
substitute situation.‘