Market Types: Why a Lemonade Stand and a Power Company Are Different

If your neighborhood has five kids all selling lemonade on the same street, you'd better make yours taste great or price it fairly -- because customers can just walk to the next stand. But what if there was only ONE company allowed to sell electricity in your whole city? That's a totally different kind of market, and economists have names for each type.

- What a 'market' means in economics - Four types of markets: perfect competition, monopoly, oligopoly, and monopolistic competition - A real example of each type - Why the number of sellers changes prices for everyone

A market is any place where buyers and sellers trade goods or services -- it doesn't have to be a physical building. Your app store, a farmers market, and the stock exchange are all markets. Economists study markets by looking at how many sellers there are and how much power each one has over prices.

In perfect competition, there are many sellers offering nearly identical products, like farmers selling corn. No single farmer can raise prices much higher than everyone else, because buyers will just go to a different farmer. This is close to our lemonade-stand example.

A monopoly happens when only one company sells a product or service, and customers have no other choice. Local water and electric companies are often monopolies, because it would be too expensive to build two sets of power lines down every street. Governments usually regulate monopolies closely so they can't charge unfair prices.

This type has many sellers like perfect competition, but each one makes their product feel a little different through branding -- think of all the different sneaker or cereal brands. Companies compete by making customers believe their brand is special, not just by having the lowest price.