Market Forces

Question 1

What is a market?

Answer 1

A market is an institution or organisation where buyers (who create a demand for the item) and sellers (who organise the production or supply of the item) of a particular good or service negotiate an agreeable price. Buyers wish to purchase at the lowest price and sellers want to receive the highest price.

Question 2

How does Australia’s market system make key economic decision and allocate resources?

Answer 2

Australia’s market system makes key economic decisions and allocates resources. Therefore, it answers the three basic economic questions where buyers and sellers negotiate to determine the price of each type of good or service. It is broken into three steps.

Question 3

Step 1 of how Australia Market System allocates it’s resources

Answer 3

• due to scarcity, people cannot have all the goods and services they want, and have to chose between wants and needs
• the choices between these two are made through the operation of a market system involving buyers and sellers and the forces of supply and demand

Question 4

Step 2 of how Australia makes economic decisions and allocates resources

Answer 4

• together, consumers and producers negotiate the equilbrium price of each good or service, establishing relative prices (price of one good or service compared with another)
• when non-price conditions affecting buyers (ie. demand or supply) change the market, and the market price rises or falls, which generates price signals
• these price signals provide information to the owners of resources and enable them to make key decisions

Question 5

Step 3 of how Australia’s market makes economic decisions and allocates resources

Answer 5

• these price signals are monitored by profit-seeking owners of resources to assist them in making decisions on how to allocate these resources eg. what type, quantity, most profitable production methods –> this answers the three economic questions of what, how and for who
• if there is a rise in the market price for a particular good or service, relative to the price of other items, it becomes relatively more profitable and attracts more resources into this type of production
• if there is a fall in the final equilibrium market price of a particular good or service, relative to that for producing other items, the production of this item becomes relatively less profitable, cutting resources and production

Question 6

What is market power?

Answer 6

Market power is basically the ability of a business to set or control the market price at which it sells its good or service.

Question 7

What is market structure and what is the four types?

Answer 7

Market Structure is a term that is used to describe the type or nature of competition and power found in different markets. There are four types of structures (small market power to much market power): pure or perfect competition, monopolistic competition, oligopoly, pure or perfect monopoly.

Question 8

Pure or Perfect Competiton Market Type

Answer 8

There is strongly rivalry between hundreds/thousands of firms selling an identical product. Individual producers are unable to set their own prices and have little or no market power, and so are called price takers.

• perfect knowledge of the market conditions exists
• ease of entry and exit by firms as there are no start-up costs or government regulations
• eg. property markets
• absence of market control
• homogenous products

Question 9

Monopolistic Competition

Answer 9

Involves quite a few firms, perhaps 20, 40, more, operating in a single industry. However, each firm uses it unique brand name and different product features to sell its items.

• quite strong competition
• product and name differentiation is important
• quite good knowledge of market conditions
• moderate ease in entry and exit
• eg. clothing, manafacturers, retail trade

Question 10

Oligopoly

Answer 10

An oligopoly is where several large firms exists (5-10), and they all control the output of the industry. Here, selling depends on brand names and there is potential for rival producers to collude to reduce prices and limit competition. Eg. oil, banking, aviation

• brand and product differentiation is vital
• difficult to enter and exit due to high start-up costs and the barriers operated by already well-established companies
• supermarkets eg.

Question 11

Perfect or pure monopoly

Answer 11

A single firm controls the output of an industry. These firms have much market power and are able to set or influence prices. They are called price makers and might include the markets like water, the only general store in town etc.

• moderate number of sellers (20-40), selling similar products to satisfy the same want
• strong competition
• brand differentiation is vital
• quite good knowledge of market conditions
• easyish to enter and exit as there are littel barriers
• clothing, retail

Question 12

Consumer Sovereignty

Answer 12

Consumer sovereignty is where the particular type of goods and services produced closely reflect what the consumers purchase, rather than this decision being made through government control or the decisions of firms about what to supply.