The Competitive Market

 buyers and sellers meet together to carry out a mutually beneficial exchange 

market def

• many buyers and sellers who can not control price or prevent others from entering or exiting the market 

competitive market def

• the quantity of g/s consumers are willing and able to purchase at various prices

demand (d) def

• the quantity of g/s consumers are willing and able to purchase at a specific price 

Quanity Demand (QD)-

• Y axis is ALWAYS price, 

•  X axis is ALWAYS quantity 

• Curve MUST have a D at the bottom (shown through the negative slope)

• Demand Graph: 

• when the price changes, it leads consumers to substitute one product for another (going to Starbucks instead of going to Dunkin, given  Dunkin price increase) 

Substitution effect:

• when price changes lead consumers to feel like they have a different income, which leads them to purchase a different quantity 

income effect

when the price increases, then the quantity demanded goes down

The Law of Demand:

• if taste changes in favor, demand increases 

• If taste changes AWAY demand decreases 

Tastes and Preferences:

• Baby bottles: if people do not have kids (demand lowers)

BUYING

• Market size: number of buyers

• Whole curve shifts

• Ex: gas when a holiday comes up, the price increases 

• If the price goes down in the future, the demand will decrease since we will wait

• Expectations by consumers: price expectations

• Normal good: normal goods like pasta NAME BRAND

  • Income up demand up

  • Income down, demand down

• Income of consumers: difference between a normal good and an inferior good

generic products (Mancuhan ramen) 

• Income up, demand down

• Income down, demand up 

• Inferior goods:

______________ in consumption are g/s consumers see as the same or similar (Pepsi and Coke, jelly and jam) 

• When the price increases, demand goes up

• Price goes down, demand goes down

Substitutions

_____________in consumption are two items we tend to purchase together (bacon and eggs, peanut butter and jelly) 

• When the price goes up, demand goes down

• When the price goes dow,n demand goes up 

Complements

)__________is how responsive consumers are to price changes

Elsatsity

• An _______ product if consumers respond 

• An _______ product is a product that we are not responsive to price changes

• ________ when neither elastic nor inelastic (between the two)

1. elastic

2. inelastic

3. unit elastic

• describes the apparent contradiction where a non-essential good like diamonds is more expensive than an essential good like water, even though water is vital for survival

Paradox of Value:

•  the economic principle stating that the satisfaction, or utility, gained from consuming each additional unit of a good or service decreases as consumption increases

Diminishing marginal utility

the quantity of g/s producers are willing and able to supply at various prices

Supply (S)

• the quantity of g/s producers are willing and able to supply at a specific price

Quantity Supply (QS)-

• when the price goes up, quantity supplied goes up. When the price goes down, the quantity supplied goes down

Law of Supply

•  g/s Producers buy to make their product

Input prices

• Substitute in production: two or more g/s that can be produced with the same resources.

•  A complement in production: two or more g/s that can be produced jointly 

Replated prices:

•  the quantity consumers are willing and able to purchase = the quantity producers are willing and able to supply

the equilibrium

• when quantity demanded is less than quantity supplied

Surplus

• when QS is less than the quantity demanded

Shortage

• when government controls price in a market 

Price control

• –goverment tries to control quantity 

Quninty control/quota

• Legal restriction on how price can go 

Price ceiling

• A business firm owned by one person, the proprietor

Sole proprietorship-

• for-profit business firm owned by two or more people, each of whom has a financial interest in the business

Partnerships

is a business firm that is itself a legal entity.

A corporation

• Sole proprietorship advantages

• Easy startups- easy and inexpensive. Set up paperwork yourself without hiring a lawyer or an accountant. The fees for licenses and permits are low

• Ease of decision making-no boss, make all decisions yourself. Respond rapidly to changing market conditions

• Ownership of profits- all profits of the business after paying taxes belong to you

• Tax benefit-profits are considered part of ordinary income

• Partnership advantages

• Larger pool of financing–each partner can contribute, banks more willing to lend money, 

• Shared decision making–this burden is shared. Each general partner may have different skills and talents 

• Parthnerships advantages

• Unlimited liability for general partners–shares personal responsibility for the debts and obligations

• Disagreements among partners–requires the agreement of all general partners. Disagreements can cause major conflicts 

• Parthenrships disadvantages

• Burden of responsibility— responsibility falls on you

• Difficulty raising funds—sole person fundraising, banks lend money to the sole proprietor  

• unlimited liability—personal responsibility for debts and other obligations of the business 

• Corporation's advantages

• limited liability for stockholders–stockholders have limited liability. Stockholders' losses are limited to what they paid to buy their shares

• Ability to raise funds by issuing shares—the only business type that can raise funds by selling shares of stock

• Ability to raise funds by issuing bonds—can borrow money directly from the public by issuing bonds

  • Corporate bond–a contract between a corporation and whoever currently owns the bond

• Rapid growth–can gain access to large amounts of money and grow rapidly

• Corporations disadvantages

• Expensive startups–forming a corporation involves higher legal fees than forming other business entities 

• Delay in decision making–layers of decision makers can make it difficult to move fast as market conditions change

• Low nonmonetary rewards: he feelings of satisfaction from owning and running your own business will be diluted in a large public corporation 

• Divide ownership of profits–corporate profits are divided among stockholders who are entitled to a portion of profits and the company, which reinvests some profits back into the company

• Tax treatment– each dollar of corporate profits is taxed twice. Special tax called corporation tax, and any profits paid to stockholders are taxed again 

• More reporting requirements–face more regulations like health, safety and environmental rules

• a hybrid business organization that combines features of corporations, partnerships, and sole proprietorship

limited liability company

• consists of a parent company and numerous associated businesses that sell a standardized good or service

Business franchise

is a legal entity formed to carry out a “not-for-profit” mission 

• nonprofit organization—

occurs when two firms legally join together ti form a single larger firm

• Merger–

the purchase by one firm of a controlling firm in another firm

•  Acquisition—

combines two firms that produce the same type of product

• Horizontal merger–

combines firms that operate at different levels in the production of the good

• vertical merger–

is a single business enterprise formed by combining firms from unrelated industries

• Conglomerate

• a company that operates in more than one country

• multinational corporation-

• the idea that products are being made at their lowest possible cost. No wasted resources, and raw materials, workers, and machines are being used to their fullest potential

Productive efficiency:

: producing things that consumers actually want. Scare resources are being allocated by the things we want

• Allocative efficiency

How price signals work in Perfect Competition?

• If consumers want something else than whats best for them, companies will make new product

• Help use our resources efficiently but not always right or just

• when sellers raise prices for essential items to a much higher price than i considered reasonable 

  • Earn more money in short run, but not effective in the long run

Price grougung

• the idea that business can drive out competitors by charging lower prices even at a short term loss

  • Competitors who can not sustain such low prices will be forced out of the market

  • Diffcult and risky when a business sucessfully eliates their compietior by selling at a loss, they must make up for higher prices later 

Below-cost pricing/predatory pricing

• Government directly controls the markets for national defense and public education 

Public economics:

• a market controlled by one seller with a Good or Service that has no close substitutes 

  • Eliminates barriers to entry 

  • Influence government to force consumers to buy from said company: crony capitalism 

Pure monopoly

• promote competition and outlaw anticompetibte tactics

  • Can also prevent comapnies from making anti-competetive deals with their suppliers

Anti-trust laws:

• outlaws any monpolization or attempted monopolization AN ACT OF LAW

Sheman act:

the act of buying companies that produce similar products

• Horizontal integration:

when a company directly owns or controls its supply chain

• vertical integration:

grants an inventor the right to profit from a specific product or process 

• Patent:

•  when its more cost effective to have one larger producer rather than several small

  • Can be privately owned or publicly owned but they rmain monopoly since government limits power

  • The monopoly can still raise prices and abuse its pwoer, so the government often regulates prices and fees 

Natural monopolies:

• broken of several regional companies 

Noncoreive monopoly:

the practice of charging different consumers different prices for exactly the same product or service

• Not just for monopolies and its not always illegal

• Needs to segregate the market based on consumers willingness to pay

  • Price discrimination works best when firms have a large share of market power. If there were hundreds of airlines it is unlikely that any one of them could price discriminate without losing customers

• Price Discrimination:

• when few firms have a large majority og market share

Oligopoly:

•  a market with many producers and relatively low barriers; their products are similar but not identical

Monopolistic competition:

• the study of strategic decision making 

  • example:

    • If they both confess, both pay 10,000

    • If nethir confess, both set free

    • One confess other pays 20000

Game theory:

•  a formal arrangement between independent firms or countries to coordinate production, pricing, and distribution of a good or service to eliminate competition and maximize profits

Cartel:

•  secret agreement or cooperation especially for an illegal or deceitful purpose 

collision

when one company changes its prices and its competitors have to decide if they’re going to follow suit 

• Price leadership:

any arrangement tha brings buyers and sellers together

a market is defined as

the “law of deman” refers to the fact that other things remaining the same, when the price of goods rises:

there is a movement up along the demand curve to a smaller qunity demanded

Gasoline prices increase by 50% and other things remain the same. As a result there is

a decrease in quinity of gasoline demanded

a demand scheudle shows

the qunities that people plan to buy in all possivle circumstance

changes in which of the following do NOT shift the demand curve?

the price of the good

the law of demand states that the relationship between price and qunity demanded is

NEGATIVE

which of the following would increase demand for a normal good?

the price of the complememt woulld increase demand

a decrease in the price of butter would likley decrease the demand for:

margarine 

which of the following will occur if consumers expect the price of a good to fall in the coming months?

demand will decrease today

which of the following will increase the demand for disposable diapers?

a new “baby boom”

two brands of water, Natural Water and Mountain Water, are close subsitues. if the price of mountain water decreases, the fall in price will

shift the demand curve for natural water LEFT

if mayas average yearly income increases, and its observed that her demand for shoes from pay-;ess shoes decreases, then shoes from payless must be considered:

infieor goods

which of the following will decrease the supply of good “x”

the wages of workers producing good x increase

a tech advance in textbook production will lead to which of the following?

an increase in textbook supply

the law of supply states that the relationship between the price and qaunity supplied is

postive

expectations among brikernstock makers is that clog prices will rise in the future. Which of the followinf will occur?

a decrease in clog supply

suppose a new ice cream truck begins operations over the summer. What is the impact on supply curve for ice cream cones?

the supply curve will shift to ther right

in 2019, an increase in torrential rain impact ohio farmers ability to yied soy beans. How does this impact the market?

supply will decrease 

which of the following is true at equilibrum?

the quanity demanded is the same as quanity supplied

a decrease in demand for coffee mugs will lead to

a decrease in price and decrease in quanity supplied

what is true about equlilbrium?

it is the point at which there is no tencdency for change

price will tend to fall when:

price is above equilibrium

which is following is certintly true if demand and supply increase at the same time?

the equilibrium quantity will increase

which of the following describes what will happen in the market for tomatoes if a salmonella outbreak is attrubted to tainited tomataoes?

demand will decrease and price will decrease 

within the market system, prices are determinded by

supply and demand

price control is:

a legal restirction on how high or low a price in a market may go

effective price celings are ineffecent because they

create shortages

in realtion to the equalibriym, price ceiling is __________ the market price

below

in relation to the equilibrium, pricefloor is __________ the market price

above

goverments generally apply price celinings in an effort to help the ___________in the market

buyer

goverments generally apply price floor in an effort to help the ___________in the market

seller