CHAPTER 14 – INTRODUCTION TO MARKET STRUCTURE

This chapter begins the explanation of how marketplace economies are organized and who their principal actors are.

Remember the "circular flow of income" from Chapter 2. We conceptually divide the economy into two major actors: firms and households. Households own the economic resources and sell the resources to firms in the "factor markets," being paid in money income. These payments to households comprise the costs of business firms. Firms take the resources, organize production, and sell the final output (goods and services) to households in the "product market" The money which firms are paid by households comprises the firm’s revenues. Where do households get the money to pay the firms? They get it from the money they were paid by the firms when they sold the resources to the firms.

So firms organize production and sell output. They have revenues and costs. The difference between their revenues and costs is their profit. The amount of profit has a major effect on the ability of a firm to finance future operations and to survive in a competitive world. Therefore, the reasonable assumption of economic analysis is that firms try to maximize profits. In a way, it is a "survival of the fittest" argument: the firms with profits survive and expand; those with losses go bankrupt and fail. The process of competition between these firms sees to it that the consumer gets the product at a reasonable cost, based on the competition between firms for the consumers’ business.

Chapter 14 frames this discussion in terms of a competitive market, whose characteristics are described in the first pages of the chapter. Later chapters will take up the situations where markets are not competitive.

Class Notes | Clint Johnson |  Economics & Finance | Departments & Majors
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