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8 views3 pagesUnderstanding Market Functioning and Prices
The document discusses the functioning of markets, emphasizing the role of price in determining the value of goods and services through supply and demand interactions. It outlines the conditions for competition and cooperation among market players, as well as potential market dysfunctions such as barriers to entry and information asymmetries. Additionally, it highlights the existence of externalities that affect economic agents' well-being, necessitating state intervention for optimal market efficiency.
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0% found this document useful (0 votes)
8 views3 pagesUnderstanding Market Functioning and Prices
The document discusses the functioning of markets, emphasizing the role of price in determining the value of goods and services through supply and demand interactions. It outlines the conditions for competition and cooperation among market players, as well as potential market dysfunctions such as barriers to entry and information asymmetries. Additionally, it highlights the existence of externalities that affect economic agents' well-being, necessitating state intervention for optimal market efficiency.
Translated by
ScribdTranslationsCopyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
Bts MCO 1 CEJM
Chapter 2: The functioning of markets
Introduction
In today's economic world, the market holds a central place in the organization of
exchanges. The market economy is thus a system in which the value of goods or
services are determined through the exchanges made by economic agents.
1. Present the functioning of the markets in which it operates.
the company
The market is the place, physical or virtual, where exchanges take place. It allows the whole
individuals to assign a value to the goods or services they wish to exchange, in
function of the utility they attribute to it.
A. The determination and role of price in different markets
The different markets
Different markets are distinguished according to the types of goods exchanged.
In the market for goods and services, exchanges take place between providers and demanders.
of goods and services (e.g.: the automotive market, the insurance market).
On the labor market, exchanges take place between economic agents who
offer their labor force (individuals seeking a job) and economic agents
who need this workforce (the companies, for example).
Remarque : la terminologie est l’inverse de celle que les étudiants appréhendent dans leur vie
daily. For them, the demand in the labor market corresponds to the job search
by individuals (the "job seekers").
The financial market allows economic agents with financing needs
to obtain capital from agents with financing capacity.
2. The determination of the price
The primary function of the market is to allow the meeting of supply and demand in order to
that an exchange price is set. This price, called 'equilibrium price', is the one that will allow
The entire offer proposed meets a demand.
To achieve this balance, the price is set through successive trial and error. It will thus influence the
quantities offered and demanded.
When the price is too high, demand will, in most cases, decrease: individuals
seek to maximize their satisfaction while taking into account their budget constraint. If the
the price is too high, some consumers will be discouraged and the quantities demanded
will decrease. Demand is therefore a decreasing function of price.
Conversely, when the price is high, the supply tends to increase. Indeed, the
Companies, attracted by prospects of higher profits, will produce more. The supply
is therefore an increasing function of the price.
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Bts MCO 1 CEJM
3. The role of price in the market
In the market, the price plays a role as a 'signal'. Indeed, it allows economic agents
to assess the value of the good or service in the market and to guide their choice. Depending on
the rarity of resources and the intensity of demand, it varies upward or downward and
indicate to the agents how to optimize their satisfaction.
B. Analyze the conditions of competition and cooperation between
the market players
Economic agents buy or sell on the market while monitoring competition.
Based on this, they then develop strategies that allow them to optimize their
market position.
The conditions of competition
A market is said to be 'competitive' when suppliers and demanders can freely engage.
to confront and that the price serves as an adjustment variable between supply and demand.
To function optimally, the market must adhere to certain theoretical rules:
The information conveyed by the price must be perfect. The price thus allows the agents
economic benefits of holding all available information about the product;
The absence of barriers to entering or exiting the market allows economic agents
to choose freely and without constraints the market in which they wish to intervene;
the atomicity of the market: the number of suppliers and demanders in the market is so
important that none of them can have a dominant position and influence the operation
of the market.
2. Cooperation in the market
In the economic reality, the theoretical conditions for competitive functioning are
rarely respected. Most companies seek to influence the market to their advantage,
either by differentiating themselves from their competitors or by developing cooperation strategies with
them.
Certain cooperation strategies are allowed because they are not intended to evade
the competition but to improve the offer on the market. This is the case when two companies
join forces to develop a new product.
On the other hand, when the objective of cooperation is to manipulate the available information.
in order to mislead the choices of economic agents, it is prohibited (e.g.: when two
companies join forces to artificially block prices or distort information on the
products).
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Bts MCO 1 CEJM
2. Analyze the dysfunctions of the market
The market does not always function optimally and the price no longer fulfills its role.
of regulation between supply and demand.
Several situations of market failure and dysfunction are therefore possible.
1. Barriers to entry and the implementation of strategies by stakeholders
economic
A barrier to entry refers to an obstacle that makes it difficult or impossible to establish a...
company in a market. We distinguish two types of entry barriers:
The natural entry barriers are independent of the producers' will and related
to the characteristics of the market, to the nature of the activity or to the regulations implemented
by the State;
Artificial entry barriers correspond to the strategies put in place by the
companies to make it harder for competing companies to access the market (e.g.: a
artificial price decrease to gain market share.
2. The existence of information asymmetries
Asymmetry of information describes a situation in which all participants in a market
do not have the same information. Some agents are therefore advantaged because they hold
information that others do not have. They can then influence the setting of the price. The
Information asymmetries must therefore be eliminated.
3. Identify the existence of externalities
The market does not incorporate all the consequences of the economic choices of agents.
Thus, some of the decisions made can impact the well-being of others.
economic agents, without being integrated into the price or giving rise to a
financial counterpart.
Two types of externalities are to be distinguished:
Positive externalities improve the well-being of other economic agents (e.g.:
The installation of a beekeeper improves the agricultural yields of the land.
surroundings) ;
Negative externalities lead to a degradation of the well-being of other agents.
economic (e.g.: pollution generated by a factory).
The price is therefore not a guarantee of optimal market efficiency and it is then necessary to
the State to intervene to ensure a sufficiently satisfactory operation to allow
the exchanges.