The conditions present in any market are used to classify markets. So, there are several conditions that economists will look at whenever they’re classifying markets.
These conditions include the existence of competition. First of all, is there competition? If so, how many competitors?
The next lesson: How Banks Function, both lessons are included in Practice Tests.[divider]The following transcript is provided for your convenience.[divider]
Once you get down to how many competitors, what are they competing with? Do they have the same products or a similar version of products, but none of them are actually the same? They also will look at the size or area of the market. Is this a local market? Just in one specific area? Is it a national market throughout a whole country? Or is it an international market, in which goods are traded between nations as well?
The number and size of suppliers are taken into consideration. How many people are producing or supplying these products? How big are the companies that are producing these products?
Influence of suppliers over price. If there’s only one supplier, that supplier could be able to control the price. If there are a couple of suppliers, then how one supplier changes their price is going to affect what the other supplier does. If there are lots of suppliers, they will still take into account what their competition is going to do regarding price.
Variety of available products – Is everyone selling the exact same products, or are they selling variations of a similar product?
Ease of entering the market. If you want to become a seller in the market or a buyer in the market, how difficult is it to do that? Can you just jump right in and do it? Or is it difficult to get into the market? Is it kind of locked down to just one particular supplier, or one particular buyer, or just two of them, or are there lots of them? If there are lots of suppliers and lots of buyers, then it will be easier to enter the market.
So, economists will classify market based on its structure and the nature of competition within the market. So, when classifying markets, keep in mind that there are several different economic conditions that will be taken into account whenever the market is classified.
The next lesson: How Banks Function, both lessons are included in Practice Tests.