Economics, 3rd Edition

MARKETS AND COMPETITION

The terms supply and demand refer to the behaviour of people as they interact with one another in mar-

kets. A 

market

 is a group of buyers and sellers of a particular good or service. The buyers as a group 

determine the demand for the product, and the sellers as a group determine the supply of the product. 

Before discussing how buyers and sellers behave, let’s first consider more fully what we mean by a 

‘market’ and the various types of markets we observe in the economy.

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THE MARKET FORCES 

OF SUPPLY AND DEMAND

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42  PART 2  SUPPLY AND DEMAND: HOW MARKETS WORK

Competitive Markets

Markets take many forms. Sometimes markets are highly organized, such as the markets for many agricul-

tural commodities and for metals. In these markets, buyers and sellers meet at a specific time and place, 

where an auctioneer helps set prices and arrange sales.

More often, markets are less organized. For example, consider the market for coffee in a particular 

town. Buyers of coffee do not meet together at any one time. The sellers of coffee are in different locations 

and offer different products (lattes, Americano, espresso, instant, filter, etc.). There is no auctioneer calling 

out the price of coffee. Each seller posts a price for a cup of coffee in their shop, and each buyer decides 

how much coffee to buy at each shop.

Even though it is not organized, the group of coffee buyers and coffee sellers forms a market. Each 

buyer knows that there are several sellers from which to choose, and each seller is aware that his product 

is similar to that offered by other sellers. The price of coffee and the quantity of coffee sold are not determ-

ined by any single buyer or seller. Rather, price and quantity are determined by all buyers and sellers as 

they interact in the marketplace.

The market for coffee, like most markets in the economy, is highly competitive. Competition exists 

when two or more firms are rivals for customers. Each firm strives to gain the attention and custom of 

buyers in the market. The market for coffee in a town will consist of established chains which are familiar 

across Europe – Costa, Starbucks, Café Nero, Koffie Café, Lavazza and Coffeeheaven, for example – but 

there will also be many small independent cafés, bars and restaurants where buyers can get a cup of 

coffee. Any of these coffee sellers faces competition from other coffee sellers.

In economics, however, there are particular characteristics ascribed to the term ‘competitive market’. 

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