Competitive Markets
OCR AS Economics Module 1 Revision Notes – Competitive Markets and How They Work
What is a ‘Competitive Market’?
• In the previous chapter, the market economy was one of the three main types of economic system
• The market economy tries to resolve the economic problem via demand and supply, through the price mechanism
• But how do markets work? And how does it allocate scarce resources in relation to our infinite wants
• There are many examples of markets, but each has the same basic characteristics:
o A willingness to trade or exchange goods and services. This is usually done using money, but bartering may be used in a developing country
o A physical place where buyers and sellers can meet or contact each other.
• Markets are also competitive
• This is because they provide for the resolution of the basic economic problem, whereby scarce resources are allocated via the price system.
• In every market where money is used, the products that are bought and sold command a price
• This reflects what suppliers wish to sell their product for and what consumers are willing to pay to consume it.
• The interaction of buyers and sellers determines the price of a product in any market situation.
• The fact that markets are competitive means that prices fluctuate
• So if more producers put more of their products on the market, the most likely result is that prices will fall.
• The same thing will happen if buyers hold back from purchasing a product
• In contrast, if producers restrict what they are willing to sell, then prices will increase, as well as a sudden surge in demand from consumers
• Markets may be relatively complex to describe
• Big markets can be split up into sub markets, and those submarkets split up further
• The same general principles for the operation of markets apply in all cases.
Demand
•
What is a ‘Competitive Market’?
• In the previous chapter, the market economy was one of the three main types of economic system
• The market economy tries to resolve the economic problem via demand and supply, through the price mechanism
• But how do markets work? And how does it allocate scarce resources in relation to our infinite wants
• There are many examples of markets, but each has the same basic characteristics:
o A willingness to trade or exchange goods and services. This is usually done using money, but bartering may be used in a developing country
o A physical place where buyers and sellers can meet or contact each other.
• Markets are also competitive
• This is because they provide for the resolution of the basic economic problem, whereby scarce resources are allocated via the price system.
• In every market where money is used, the products that are bought and sold command a price
• This reflects what suppliers wish to sell their product for and what consumers are willing to pay to consume it.
• The interaction of buyers and sellers determines the price of a product in any market situation.
• The fact that markets are competitive means that prices fluctuate
• So if more producers put more of their products on the market, the most likely result is that prices will fall.
• The same thing will happen if buyers hold back from purchasing a product
• In contrast, if producers restrict what they are willing to sell, then prices will increase, as well as a sudden surge in demand from consumers
• Markets may be relatively complex to describe
• Big markets can be split up into sub markets, and those submarkets split up further
• The same general principles for the operation of markets apply in all cases.
Demand
•