Question

What are the four required characteristic needed for a market system to work properly and discuss them.

Answer 1

A market system may be perfectly competitive, monopoly, monopolistic, or oligopoly but their characteristics are the same.

Required characteristics are as below:

No.1) The act of demand and supply: a market system works on the act of demand and supply. If demand is higher than supply there is shortage and if demand is smaller than supply there is surplus.

No.2) The act of price: a market system works on the basis of price structure. A perfectly competitive market is price taker (means, the price is fixed and no one can influence of it) but all the other markets are price setter (means, they can set any price but demand could only be high if such price is low).

No.3) The search of equilibrium: each market searches for the optimum level of production, which is equilibrium. If the market is perfectly competitive, the equilibrium point is (price = marginal cost); in case of other market structures, the equilibrium level of production is (marginal cost = Marginal revenue).

No.4) Minimizing cost: each market structure wants to minimize cost so that they can make profit. Both price taking and price setting firms try to reduce their average total cost (ATC) at the profit-maximizing stage, which is the equilibrium point.