Markets

Business AS Level

Unit 1

A market

What is a market?

A market is any place that buyers and sellers will come together to exchange goods or services. There will normally be an exchange of money at a set price.

What is the nature of the market?

Today, markets take numerous forms e.g. local, national, physical or electronic. Examples include the corner shop, the Stock Exchange, the housing market and the Internet for online retailing e.g. eBay or ASOS.

What is competition?

The number of firms that are operating in the same market. They are competing to sell similar products to the same target market.

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Competition

• A competitive advantage is a feature of a business that allows it to perform more successfully than others in the market
• Business will employ many tactics and strategies to compete, these include:
• New product development
• Changing/improving existing products
• Promotions
• Changing prices
• Improving distribution networks including online sales
• Quality assurance
• Improved customer service – staff training

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Types of markets

• Types of markets include:
• Local/global
• Mass/niche
• Trade/consumer
• Product/service
• Seasonal

Types of markets

• Types of markets include:
• Local/global
• Is the business selling to a small geographical area e.g a local butcher or across the world e.g. a multinational business such as Nestle
• Mass/niche
• Large or small target market
• Trade/consumer
• Selling to other businesses or private individuals
• Product/service
• Products are physical or tangible products e.g. a car or a television
• Services are non physical or intangible e.g. financial consultancy or teaching
• Seasonal
• Sales peak at certain times of year e.g. B&B bookings in the summer months

Mass markets

• Mass markets
• A product is targeted at a wide range of people
• The market is not segmented i.e. the characteristics of types of customers are not an important factor
• Products appeal to a wide range of customers
• Products are widely available through a range of markets
• Mass media is used to advertise the products

Niche markets

• Identifying small, currently unsatisfied, gaps in the market
• The target market is well defined with distinct characteristics
• Promotional activities will be targeted at just a small subsection of the whole market
• Can often charge higher prices

Trade/consumer markets�

• Trade markets are where businesses are selling to other businesses (B2B)
• The technical specification of the product and service provided by as sales person or account manager is likely to be more important than the physical environment

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• Consumer markets are where businesses are selling to the public (B2C)
• The product and the price may be seen as of equal importance to the physical environment but more important than place e.g. does it matter what channels the product went through to reach the consumer

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Market Data

• Market size – this is the total value or volume of sales in the market. It can be measured in money terms e.g. £20 million or by the amount sold e.g. 1 million cars
• Calculated as: Number of units sold x price
• Market share – this is the proportion of total market sales that a firm has
• Calculated as: Sales of one firm/Total market sales x 100
• Market trends – these are the overall changes in the market
• Is the size of the market growing, static or declining?
• Which businesses are gaining or losing market share?

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��Market segmentation

• Market segmentation occurs when the market is split into subgroups of consumers with similar characteristics
• This helps to identify different types of consumer and different wants and needs
• Segmentation methods include:
• Demographic
• Geographic
• Income
• Behavioural

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�� Demographic segmentation

• Identifies subgroups of the population based on their demographic profile or characteristics
• Age
• Gender
• Level of education
• Race
• Religion
• Family size
• Stage in life e.g. empty nesters

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• Demographics looks at the social and economic characteristics of individuals and households

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Market Segmentation

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Market Segmentation | How Gymshark use Market Segmentation Explained. (youtube.com)

�� Geographic segmentation

• Geographic segmentation defines market categories based on where people live e.g. regions, cities or neighbourhoods
• People in different geographical areas display different characteristics and needs e.g.
• The South East of England is generally warmer than Scotland
• Tastes and traditions vary between countries
• Infrastructure in rural areas will differ from that of cities

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�� Income segmentation

• Identifying subgroups of the market based on their levels of income and profession
• A common method uses socio-economic groupings
• A – Higher managerial such as chief executives and directors
• B – Intermediate managerial such as solicitors, accountants and doctors
• C1 – Supervisory, clerical or junior professional such as teachers and junior managers
• C2 – Skilled manual such as plumbers, electricians and carpenters
• D – Semi and unskilled workers such as refuse collectors and window cleaners
• E - Pensioners, casual workers, students and unemployed

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Behavioural segmentation

• Characterises subgroups based on the behavioural patterns of the consumer rather than their characteristics
• Reasons for making purchases e.g. needs, emotional, rewards
• Frequency of purchase e.g. heavy user or light user
• Time of purchase e.g. seasonal, weekly, late at night
• Brand loyalty
• Method of purchase e.g. online
• Triggers e.g. response to digital marketing

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�� Impact of market segmentation

• There are a number of benefits for businesses and customers of market segmentation:
• Advertising can be targeted at specific market segments so that advertising spend is more effective
• The most profitable and least profitable customers can be identified
• Least profitable markets can be avoided
• It becomes easier to identify and launch new products
• It helps the firm improve existing products and customer service
• Businesses are better able to meet the specific needs of groups of customers
• Greater variety of goods and services available in the market

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Competition

• The competitive environment is the degree of competition in the market and the buying and selling power of customers and suppliers within that market
• Market structure is the number of firms within an industry and the way in which those businesses behave e.g. differentiating products
• Monopoly occurs when one firm dominates the market
• Oligopoly occurs when a few firms dominate the market
• Monopolistic competition occurs when there are many firms in the market but there is some form of product differentiation

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The model of perfect competition – the assumptions�

• The model of perfect competition is based on the following assumptions:
• Large numbers of producers
• Identical products
• Freedom of entry and exit
• Readily available information

�Large numbers of producers��

• In perfect competition there are a large number of producers in the market
• Each firm is relatively small in size and sell to a large number of small buyers
• All of these producers are price takers i.e. they are not large enough to influence price
• Each firm can sell all of its output at the current market price
• Therefore, it would not lower its price
• If it were to raise price it would sell nothing as buyers would go to another seller

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�Identical products

• In perfect competition all products are identical
• Buyers cannot tell the difference between products from different firms
• Therefore, there is no branding of products and brand loyalty does not exist
• This means that firms are unable to raise prices much beyond their competitors
• In reality firms are unlikely to sell identical products, even carrots will be of different quality and branding will differentiate the product in the eyes of the consumer

�Freedom of entry and exit���

• In perfect competition there are no barriers to entry or exit
• This means firms are free to enter or exit the market if they wish to do so
• Therefore, entry costs will be low or non-existent
• Barriers to entry such as costs associated with capital expenditure, research and development and start-up of the business are low or non- existent
• This means firms can move into the market if they see that profits are higher than normal
• This restricts the opportunities available for firms to charge higher prices

�Readily available information���

• In perfect competition there is readily available information or perfect knowledge
• Perfect knowledge occurs when all economic agents e.g. buyers and sellers have a comprehensive understanding of all factors within a market e.g. prices and availability
• All buyers will have information about all prices and the availability of goods and services in the market
• All sellers have the same knowhow in how to produce goods and services so produce the same quality of output

��Imperfect competition��

• Imperfect competition is a type of market structure that exhibits some but not all elements of perfect competition
• Differences include:
• There are less firms in the market
• There is some form of product differentiation
• There are at least some barriers to entry and exit
• The demand curve is downward sloping
• Suppliers can influence prices

�Monopoly

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�Monopoly�

• Price leaders - they can charge high prices but are often restricted from doing so by government regulation
• New product development is not effected by competitors
• Monopolies will use promotion to inform and persuade customers
• They can increase sales revenue through increasing market size
• How monopolies distribute and sell goods and services depends on the type of product
• For example, the water companies must supply water to their region

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�Monopoly�

• A monopoly exists where there is only one firm in the market
• However, the Government refer to any company that has at least 25% market share as having monopoly powers
• Monopolies can exploit consumers by charging high prices. Therefore, monopolies are regulated in order to protect the customer
• Barriers to entry exist in monopoly markets that stop firms from entering the market. These include:
• high costs to enter the market, especially high capital costs
• economies of scale experienced by large firms e.g. bulk buying
• legal barriers e.g. only pharmacies can sell prescription drugs
• A pure monopoly has only one firm in the industry

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�Duopoly�

• A duopoly exists where there are only two firms in the market
• Like monopolies, duopolies can also exploit consumers by charging high prices
• Similar barriers to entry that exist in monopoly markets also affect duopolies
• Duopolies tend to compete on non-price competition such as promotion
• Duopolies are often accused of collusion (making agreements between each other that restrict competition). This is illegal and firms that collude can be heavily fined

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�Oligopoly

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What Are Current Examples of Oligopolies? - YouTube�

�Oligopoly�

• An oligopoly exists where there are only a few firms in the market. Like monopolies and duopolies, oligopolies can exploit consumers by charging high prices
• Barriers to entry exist in oligopolistic markets, particularly through advertising
• Oligopolies tend to compete on non-price competition such as promotion and there may also be an element of collusion
• It is important for oligopolists to take into account the reaction of competitors when making decisions regarding pricing. For example, if one firm cuts price, then others are likely to follow suit, resulting in a lower income for the market as a whole
• Therefore, oligopolists are unlikely to lower price as a long term strategy

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�Oligopoly�

• Oligopolies exhibit the following characteristics:
• Do not tend to compete on price in the long run
• However, oligopolists might compete on price as a tactic (short run)
• Tend to spend heavily on new product development
• Branding is crucial and expensive marketing budgets are available
• Firms must ensure that their products are accessible if they are going to be successful

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�Monopolistic competition�

• Monopolistic Competition exists where there are a large number of firms in the market selling differentiated products. This leads to a small degree of monopoly power as each firm offers something different to the others
• In this type of market barriers to entry are very low. Therefore, it is easy for firms to enter the market. This creates strong competition
• This mix between monopoly power and competition leads to the term monopolistic competition
• Firms within this market will try to brand their product. This might be through the building up of a reputation
• There are numerous examples of this type of competition such as hairdressing, restaurants and the health and beauty industry

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Barriers to entry�

• Barriers to entry exist when firms that are within an industry are protected from competition from outside of the industry
• These obstacles may occur naturally or through man-made intervention
• Barriers to entry include:
• Advertising
• Economies of scale
• Financial

�Product differentiation�

• Firms try to make their product different to the competition by adapting the actual product in some way or by distinguishing the product through advertising and branding
• A business might have a product range selling a variety of goods or services to meet consumer needs
• With high competition in most markets it is important that a business tries to differentiate itself from the competition in order to sell
• A Unique Selling Point (USP) is something that distinguishes a firm’s product from those of its competitors and can allow a firm to charge a premium price

demand

• Demand is the amount society is willing and able to buy at a set price at a given point in time
• A normal good is one where, if price rises, demand will fall and vice versa i.e. there is a negative correlation
• The two variables price and demand move in the opposite direction to each other
• The relationship between price and quantity demanded can be shown using a demand curve
• A demand curve is a graphical representation of the relationship between price and quantity demanded
• The demand curve shows the quantity demanded for a good, at any given price, over a period of time
• As price falls quantity demanded rises
• As price rises quantity demanded falls

The demand curve

Rules for drawing a demand curve:

1. label the y axis price and the x axis quantity
2. draw the demand curve downward sloping from left to right and label it demand (or D)
3. to find the quantity demanded at any given price:

a) select a price (P), shown on the y axis

b) draw a dotted line towards the demand curve

c) draw a dotted line down towards the x axis to show quantity (Q)

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The demand curve

Rules for drawing a demand curve:

1. label the y axis price and the x axis quantity
2. draw the demand curve downward sloping from left to right and label it demand (or D)
3. to find the quantity demanded at any given price:

a) select a price (P), shown on the y axis

b) draw a dotted line towards the demand curve

c) draw a dotted line down towards the x axis to show quantity (Q)

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It is important that you master the drawing of diagrams in Business. Marks are often lost for the incorrect drawing of diagrams.

The demand curve

A change in price from P to P1is shown by a movement along the demand curve lowering quantity demanded form Q to Q1.

A change in price is shown by a movement along the demand curve.

The demand curve

A change in price from £10 to £15 is shown by a movement along the demand curve with quantity demanded falling from 100 to 120 units.