Economics: Market Structures, Demand, and Competition Strategies

Competitive markets

More successful at providing most of the things that people want.

Central planning

Everyone that wants a job has a job.

Production aims

To meet an idealized version of society's goals.

Productive efficiency

The idea that products are being made at their lowest possible cost.

Allocative efficiency

The things that we are producing are the things that consumers actually want.

Scarce resources

Benign allocated towards the things we value.

Price signals

Tell producers what to make and help distribute things to the people that value them most.

Competition between producers

Keeps prices and quality up (invisible hand theory).

Price gouging

Happens when sellers raise prices for essential items like food, water, or gasoline, usually during emergencies.

Anti-price gouging laws

Enacted in 34 states; some argue they promote inefficiency.

Predatory pricing

Business can drive out competitors by charging lower prices even at a short-term loss.

Pure monopoly

A market controlled by one seller with a good or service that has not been substituted.

Monopoly power

A single company with a huge market share, like Google, can operate like a monopoly.

Anti-trust laws

Outlaws any monopolization or attempted monopolization.

Horizontal integration

The act of buying companies that produce similar products.

Vertical integration

When a company directly owns or controls its supply chain.

Patent

Essentially guarantees the right to be a monopoly but not forever; usually expires 20 years later.

Monopoly

When one large company produces a product with few subsidies and prevents competition, having a lot of control over price.

Monopolistic Competition

A market with many producers and low barriers to entry, where firms could possibly charge a slightly higher price.

Oligopoly

Markets that have high barriers to entry but are controlled by few companies, often selling similar but not identical products.

Price Discrimination

The process of charging different consumers different prices for exactly the same product, requiring market segregation based on willingness to pay.

Game Theory

The study of strategic decision making, focusing on how individuals or companies make decisions considering the actions of others.

Collusion

An agreement among firms to limit competition, which is illegal in the US.

Barriers to Entry

Obstacles that prevent new competitors from easily entering an industry or area of business.

Market Control

The ability of a firm or group of firms to influence the price of a product or service in the market.

Consumer Willingness to Pay

The maximum price a consumer is willing to pay for a product or service.

Product Differentiation

The process of distinguishing a product from others to make it more attractive to a specific target market.

Advertising in Competitive Markets

In competitive markets, advertising increases costs and does not significantly impact consumer choice due to product similarity.

Control Over Prices

The ability of a firm to set the price of its products, often seen in monopolies and oligopolies.

Strategic Decision Making

Making decisions based on the anticipated actions of competitors and the overall market environment.

Market Segregation

The division of a market into distinct groups of consumers based on varying characteristics, such as willingness to pay.

Product Similarity in Oligopolies

Oligopolies often sell products that are similar but not identical, allowing some control over pricing.

High Barriers to Entry

Conditions that make it difficult for new firms to enter a market, often leading to oligopolistic structures.

Firms in Monopolies

Monopolies do not need to advertise because they face no competition.

Decision-Making in Oligopolies

Oligopolies make decisions with the actions of their competitors in mind, often leading to strategic behavior.

Competitive market

A market where there are many buyers and sellers of the same goods and services.

Demand (D)

The quantity of goods and services consumers are willing to purchase at various points.

Quantity Demand (QD)

Quantity of goods and services consumers are willing to purchase at a specific price.

Law of demand

Higher price leads to a lower quantity demanded, vice versa, lower price leads to a lower quantity demanded.

Inferior good

Any good or service that a consumer would demand less of when real income increases, or any good or service that a consumer would demand more of if real income decreases.

Normal good

Any good or service that consumers would demand more of as real income increases.

Luxury good

A normal good, but not all normal goods are luxury goods.

Substitutes

A good or service that a consumer sees as similar to another product.

Complements

A good or service used in conjunction with another good or service.

M.E.R.I.T.

Major factors that change demands or Shifters of Demands.

Market side (M)

The number of consumers increases, and the demand increases; the number of consumers decreases as the demand decreases.

Expectations by consumers (E)

If the price is expected to rise, then the demand will increase; if the price is expected to fall, then the demand will decrease.

Related Prices (R)

If the substitute price goes up, then the demand goes up; if the substitute price goes down, then demand goes down.

Income of consumers (I)

If there is a normal good and an income increase, then demand increases; if there is a normal good and an income decrease, then demand decreases.

Taste and preferences (T)

Factors that affect consumer choices and demand.

Elasticity (of demand)

A measure of how consumers respond to price changes.

Inelastic demand

Not very sensitive to changes in price (<1).

Elastic demand

Very sensitive to changes in price (>1).

Unitary elastic

Elasticity equals 1.

Elasticity formula

Elasticity = (PC in QD)/(PC in P), where PC=(New-Old)/Old.

Supply(s)

Quantity of goods and services producers are willing and able to supply at various prices.

Quantity Supplied (QS)

Willing to sell at a specific point.

Input

A good or service used to produce another good or service.

Substitutes in Production

Two or more goods can be produced with the same resources.

Complements in Production

Two or more goods that are jointly produced given available resources.

T.R.I.C.E.

Factors affecting supply.

Technology (T)

Technology used to produce a good increases supply.

Related goods and services price changes (R)

If product A and product B are substitutes in production, then if the price of product B increases, the supply of product A goes down, and vice versa.

Input prices (I)

If the price of an input used to produce product A increases, then the supply of product A decreases.

Competition (C)

If the number of producers of A goes up, then the market supply goes up; if the number of producers goes down, then the market supply of A goes down.

Expectations of Producers

If the price of A is expected to go up in the future, the supply of A is going to go down today.

Weather

If the weather destroys product A, then the supply of product A goes down.

Government

FDA regulations.

Subsidy

Paying people to make as much of that good or service as they can.

Taxes/Tariffs

Government-imposed financial charges on goods.

Equilibrium

An economic situation where no individual would be better off doing something different (mutually beneficial exchange).

Surplus

Occurs when the quantity supplied is larger than the quantity demanded.

Shortage

Occurs when the quantity demanded is less than the quantity supplied.

Price Control

Legal restrictions on how high or low a market price can go.

Price Ceiling

A max price sellers are allowed to charge for a good or service.

Price Floor

Minimum price buyers are required to pay for goods and services.

Sole Proprietorship

A business entity owned by one person, known as the proprietor.

Business Registration

Business owners must register their business with the state and comply with the federal, state, and local laws.

Tax Responsibilities

Business owners must pay taxes on profit and keep records of all costs and revenue.

Advantages of Sole Proprietorship

Easy start-up, no need for a lawyer or an accountant, ownership profits go to the owner.

Disadvantages of Sole Proprietorship

Burden of responsibility, difficulty raising funds, unlimited liability.

Partnership

A for-profit business firm owned by two or more people, called partners.

Partnership Agreement

A written document that identifies the roles, responsibilities, and obligations of partners.

General Partners

People who share full financial and decision-making responsibilities in a partnership.

Limited Partners

People who invest money in the partnership but do not share in the decision-making or full financial responsibility.

Advantages of Partnerships

Includes larger pool of financing, shared decision making, and a combination of different skills and talents.

Disadvantages of Partnerships

Includes unlimited liability for general partners and potential disagreements among partners.

Corporation

A business firm that is itself a legal entity and is the most expensive type of business to organize.

Safeguards for Investors

Regulations that help ensure that people are not cheated or misled in corporate settings.

Corporate Charter

A document that must be completed with the help of a lawyer to establish a corporation.

Stockholders

Individuals or entities that own shares in a corporation.

Advantages of Corporations

Includes limited liability for stockholders, ability to raise funds by issuing shares, and rapid growth potential.

Corporate Bond

A contract between a corporation and the owner of the bond obligating the corporation to pay interest payments in the future.

Economic Scale

The cost per unit falls as output rises because the major cost is being spread over a growing quantity of output.

Disadvantages of Corporations

Includes expensive start-up costs, delays in decision-making, and divided ownership of profits.

Tax Treatment of Corporations

Each dollar of corporate profits is taxed twice.

Limited Liability Companies

A hybrid business organization that combines features of corporations, partnerships, and sole proprietorships.

Business Franchise

A business franchise consists of a parent company and numerous associated businesses that sell a standard good or service.

Common Industries for Sole Proprietorships

Common in industries like healthcare, real estate, retail trade, agriculture, and the arts.

General Business License

Obtain a general business license from the local and state governments.