1.2 Markets and Competitive Advantage

A market is any place, physical or online, where sellers (businesses) and buyers (their customers) come together. A farmers' market is a market. So is an app store, or the worldwide market for cotton. Markets can be local, regional or global.

Trades in a market are voluntary: nobody has to buy or sell. Each sale brings the seller revenue, and it gives the buyer a product they need or want. Both sides expect to be better off, or they wouldn't trade.

Sellers want high prices so they earn more profit. Buyers want low prices so they save money. When there are many sellers and many buyers, this push and pull settles on a market price, the going price most sales happen at. If one gas station charges far above the stations around it, drivers go elsewhere, so prices in a busy area end up close together.

Competitive advantage is being able to outperform your rivals in the same market. It shows up as a bigger market share (your slice of all the sales in the market) and, often, higher profits.

Markets aren't equally competitive. A market is more competitive when there are many rivals, when products are similar, and when rivals can easily sell the same thing for less. It's less competitive when products are differentiated, meaning they have features that set them apart.

• Lowest cost and price. In commodity markets, where every seller's product is basically the same (wheat, corn, copper), customers mostly compare prices. The winner is the business that produces most efficiently and can charge the lowest price.
• A better or different product. When rivals' products differ, a business can show customers why its product is superior: higher quality, unique features, better customer service, a lower price than similar products, or more effective marketing.
• Barriers to entry. These are obstacles that keep new competitors out: patents and other intellectual property, regulations that limit rivals, control over scarce suppliers, high startup costs, and very low prices that only a huge business can afford.

A monopoly is a market with only one seller of a unique product, so customers can't shop around. A drug company with a patent on a new medicine may be the only legal seller for years. A monopoly doesn't have to compete for customers, so it works hard to keep its barriers to entry standing, for example by defending its patents or locking up key suppliers.

You won't be asked to draw or shift supply and demand graphs on this exam. That belongs to AP Microeconomics. You do need to explain in words how buyers and sellers reach a market price.