Questions & Answers: Economics - Markets

Review market failure.
When any of the elements for a successfully competitive market are missing, this can lead to a market failure. Certain elements are necessary to create what economists call “perfect competition.” If one of these factors is weak or lacking, the market is classified as having “imperfect competition.” Worse than imperfect competition, though, is a market failure.

There are five major types of market failure:
· Competition is inadequate
· Information is inadequate
· Resources are not mobile
· Negative externalities, or side effects
· Failure to provide public goods
Externalities are side effects of a market that affect third parties. These effects can be either negative or positive.

Which conditions are important to know in order to classify a market?
The conditions prevailing in a given market are used to classify markets.

Conditions considered include:
· Existence of competition
· Number and size of suppliers
· Influence of suppliers over price
· Variety of available products
· Ease of entering the market
Once these questions are answered, an economist can classify a certain market according to its structure and the nature of competition within the market.