Markets and Exchange

Markets and Exchange

Product markets vary in their competitiveness. Markets that firms can easily enter and exit and in which firms produce very similar goods are called perfectly competitive. Per- fect competition implies that many similar goods are vying for customers and that they offer corporations less potential profits than imperfectly competitive markets do. On the other hand, markets are characterized by imperfect competition when entry is restricted or goods are differentiated. Perfect and imperfect competition are particularly important concepts. In fact, we take a hard look at market imperfections and how corporate manag- ers use them to increase the wealth of the firm’s shareholders.

2.2 Markets and Exchange

Before describing the markets in which corporations operate, we want to discuss the role of markets in general. All markets, no matter what their form, have a common purpose: They provide a mechanism for individuals and businesses to exchange goods and services by bringing interested buyers and sellers together. Transactions between willing participants result in both parties being better off. If each trader did not believe that the trade was in his or her interest, they would not make the exchange. There- fore, markets enhance people’s well-being.

Markets are essential to any economic system, and evidence of markets is found in even ancient societies. Markets come in a variety of shapes and sizes. They can be places, such as shopping malls and the floor of the New York Stock Exchange. But exchange no lon- ger requires going to a particular physical location. Modern telecommunications allows markets to be computer networks, like eBay, or television programs. Catalogs are another example of markets without a physical location. The importance and desirability of conve- nient and speedy exchange means that markets undergo constant refinement and change. Immense energy and ingenuity goes into developing ways to facilitate exchange. Every- one benefits as exchange becomes easier and cheaper, and more sellers (with a broader range of goods and services) can meet more buyers (with more money and a broader range of needs and desires).

In ancient markets, goods were bartered, or exchanged, without any money changing hands. Today, money is used as the medium of exchange. When exchange occurs, price is established, even in barter markets. For instance, if a Toyota is exchanged for 30 cases of fine French burgundy, then the price of the Toyota is established as 30 cases of wine, or the price of a case of wine is 1/30th that of a Toyota. Money facilitates exchange because it is commonly accepted as a means of counting and storing value. Using money in transac- tions means that the French are not limited to driving cars manufactured by companies willing to trade for wine and that Japanese car manufacturers can consume something other than burgundy. Exchange without money severely limits the set of goods and ser- vices available to consumers. Many members of the European Union took the ease of exchange a step further when they formed a monetary union, adopting the euro as a single currency for use across much of the continent.

Often our view of markets and exchange extends only to shopping for physical items. However, when we buy or hire services, we exchange money for another person’s time.

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