A market is a mechanism or place (which can be physical or virtual) where buyers and sellers interact to exchange goods and services. This interaction determines the price and quantity of goods and services traded. Crucially, it's characterized by competition between buyers and sellers.

Markets are considered efficient resource allocators for several reasons:

• Price Signals: Prices act as signals to both buyers and sellers. High prices indicate scarcity and encourage increased production, while low prices indicate surplus and encourage decreased production. This helps allocate resources to where they are most valued.
• Competition: Competition between sellers leads to lower prices and encourages innovation and efficiency. Sellers are motivated to offer better quality goods or services at competitive prices to attract customers.
• Consumer Sovereignty: Consumers ultimately decide what goods and services are produced through their purchasing decisions. If consumers demand a particular product, producers will respond.
• Specialisation and Division of Labour: Markets facilitate the specialisation of producers in producing goods and services they are most efficient at, and the division of labour, leading to increased overall productivity.

Examples: Consider the market for apples. If there's a high demand for apples and a limited supply, the price will rise. This signals to farmers to produce more apples in the future. Conversely, if there's a surplus of apples, the price will fall, prompting farmers to reduce production or find alternative uses for their apples. The same principle applies to virtually any market – from labour to financial assets.

The price elasticity of demand (PED) measures the responsiveness of quantity demanded to a change in price. Different market structures have varying characteristics that significantly impact PED.

Perfect Competition: This market structure has many small firms, homogeneous products, and free entry and exit. PED is typically elastic. This is because consumers have many alternatives, so if the price rises, they can easily switch to a competitor. For example, consider the market for agricultural products like wheat. If the price of wheat increases significantly, consumers can switch to other grains or substitute goods. The ease of entry and exit also contributes to PED; if profits are high, new firms will enter, increasing supply and driving prices down.

Monopoly: A monopoly has a single seller and significant barriers to entry. PED is generally inelastic. Consumers have no close substitutes, so they are less responsive to price changes. For example, a local utility company providing electricity often operates as a monopoly. Even if the price increases, people still need electricity, so demand won't fall significantly. The barriers to entry prevent other companies from competing and offering alternative products.

Oligopoly: This market structure has a few large firms that dominate the market. PED can be either elastic or inelastic, depending on the degree of product differentiation and the nature of competition between firms. If products are highly differentiated (e.g., cars), PED might be relatively elastic as consumers can switch between brands. However, if products are similar (e.g., steel), PED might be inelastic. An example is the market for automobiles. Consumers have many brands to choose from, so demand is relatively elastic. However, if the remaining few car manufacturers collude, demand becomes more inelastic.

Monopolistic Competition: This market structure has many firms selling differentiated products. PED is relatively elastic. The product differentiation allows firms some control over price, but consumers have many alternatives. For example, the restaurant industry is a good example. Consumers can choose from a wide variety of restaurants, each offering a slightly different menu and atmosphere. If one restaurant raises its prices significantly, consumers can easily switch to another.

In summary, the characteristics of a market structure – number of sellers, product differentiation, barriers to entry – directly influence the ability of consumers to switch to alternatives when prices change, thereby affecting the price elasticity of demand.

A change in consumer income will impact the market for a good through its effect on demand.

Increase in Income (Normal Good): If consumer income increases, the demand curve for most goods will shift to the right. This is because consumers have more disposable income and are willing to purchase more of the good at each price level. The rightward shift in the demand curve leads to a higher equilibrium price and a higher equilibrium quantity. The increased demand puts upward pressure on prices, and sellers respond by increasing output.

Decrease in Income (Normal Good): If consumer income decreases, the demand curve will shift to the left. Consumers buy less of the good at each price level. This results in a lower equilibrium price and a lower equilibrium quantity. Sellers may reduce output and potentially lower prices to maintain sales.

Increase in Income (Inferior Good): For an inferior good (e.g., a cheaper brand of tea), an increase in income will lead to a decrease in demand. The demand curve shifts to the left, resulting in a lower equilibrium price and quantity. Consumers switch to higher-quality alternatives as their income rises.

Decrease in Income (Inferior Good): For an inferior good, a decrease in income will lead to an increase in demand. The demand curve shifts to the right, resulting in a higher equilibrium price and quantity. Consumers purchase more of the cheaper alternative as their income falls.