MECHANISMS OF MARKETS

In economics, a market that runs under laissez-faire policies (or an economic system in which
transactions between private parties are free from government intervention such
as regulation, privileges, tariffs and subsidies) is called a free market, it is "free" from the government,
in the sense that the government makes no attempt to intervene through taxes, subsidies, minimum
wages, price ceilings and so on. However, market prices may be distorted by a seller or sellers
with monopoly power( monopoly exists when a specific person or enterprise is the only supplier of a
particular commodity, this contrasts with a monopsony), or a buyer with monopsony power( a market
structure in which only one buyer interacts with many would-be sellers of a particular product). Such
price distortions can have an adverse effect on market participant's welfare and reduce the efficiency of
market outcomes. The relative level of organization and negotiating power of buyers and sellers also
markedly affects the functioning of the market.

Markets are a system and systems have structure. The structure of a well-functioning market is defined
by the theory of perfect competition. Well-functioning markets of the real world are never perfect, but
basic structural characteristics can be approximated for real world markets, for example:

 Many small buyers and sellers

 Buyers and sellers have equal access to information

 Products are comparable

Markets where price negotiations meet equilibrium, but the equilibrium is not efficient are said to
experience market failure. Market failures are often associated with time-inconsistent
preferences, information asymmetries, non-perfectly competitive markets, principal–agent
problems, externalities, or public goods. There exists a popular thought, especially among economists,
that free markets would have a structure of a competition. The logic behind this thought is that market
failures are thought to be caused by other exogenic systems (exogenous change is one that comes from
outside the model and is unexplained by the model), and after removing those exogenic systems
("freeing" the markets) the free markets could run without market failures. For a market to be
competitive there must be more than a single buyer or seller. It has been suggested that two people
may trade, but it takes at least three persons to have a market, so that there is competition in at least
one of its two sides. However, competitive markets—as understood in formal economic theory—rely on
much larger numbers of both buyers and sellers.

In market economies, there are a variety of different market systems that exist, depending on the
industry and the companies within that industry. It is important for small business owners to understand
what type of market system they are operating in when making pricing and production decisions, or
when determining whether to enter or leave a particular industry.