Econ: Market Structure


Prices and the price system determine what goods and services will be produced, how they will be produced, and who will receive them. Prices are affected by many factors. Stock prices fluctuate daily. The price of a bus ride is likely to remain unchanged for years. Unbranded goods cost less than the ones with the well-known name. Candy bars at the checkout counter all seem to sell for the same price. Cell phone companies operate differently from coffee shops, grocery stores, or car dealerships. The truth is that even in a free market economy, not all industries and markets are equally competitive. Market structure refers to the organization of a market based mainly on the degree of competition among producers. Economists define market structure according to four main characteristics: number of producers, similarity of products, ease of entry, and control over prices. 

The number of producers in a market helps determine the level of competition. Markets with many producers are more competitive.

The degree to which products in a market are similar also affects competition. The more similar the products are, the greater the competition among their producers.

Markets differ in their ease of entry, which is a measure of how easy it is to start a new business and begin competing with established businesses. Markets that are easy to enter, with few restrictions, have more producers and are thus more competitive.

Markets also differ in the degree to which producers can control prices. The ability to influence prices, usually by increasing or decreasing the supply of goods, is known as market power. The more competitive the market, the less market power any one producer will have.



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