Decision-making in Markets

Market

Any place (which may or may not be a physical space) that allows buyers and sellers to interact and exchange goods and services

Assumptions of a competitive market

• A large number of buyers and sellers

• Homogenous products

• Ease of entry and exit into the market

Market Structures

• Pure or perfect competition

• Monopolistic Competition

• Oligopoly

• Pure or perfect monopoly

Pure or perfect competition

• many buyers and sellers

• extremely strong competition

• Producers are price takers, consumers are price makers

• ease of entry and exit

• homogenous products

• perfect knowledge of market conditions

Monopolistic Competition

• moderate number of buyers and sellers

• quite strong competition

• producers are price takers

• few barriers to entry or exit

• product differentiation exists and is important

• quite good knowledge of market condition exists

Oligopoly

• relatively few buyers and sellers

• limited competition

• producers are price takers

• difficult to enter or exit due to high start up costs

• product differentiation exists and is important

• knowledge of market conditions in favour of producers

Pure or perfect monopoly

• one seller controls output with no other substitute

• no competition, no rival sellers

• producers are price makers, buyers are price takers

• entry and exit is difficult due to high start up costs

• product differentiation is irrelevant

• knowledge of market condition mostly in producers favour

Law of Demand

as the price of a product increases, the total quantity demanded decreases, and as the price decreases the total quantity demanded increases. There is an inverse relationship between price and quantity demanded

Demand Curve

illustrates the inverse relationship between price and quantity demanded

Demand for a goods or service represents

the willingness and ability of buyers or consumers to purchase goods and services. remembering a rational consumer will seek to purchase products at the lowest price to maximise value from purchasing and consumption - gain maximum utility.

Contraction in Demand

A movement up the demand curve is a contraction in demand. A higher price discourages consumers and causes them to decrease consumption in the market over time.

Expansion in Demand

A movement down along the supply curve is an expansion of demand. A lower price encourages consumers to increase consumption over time.

Non-price factors of Demand

Change in the willingness or ability of consumers to purchase products in the market. These will either cause demand to increase or decrease.

• Disposable Income

• Price of Substitutes

• Price of Compliments

• Consumer Sentiment

• Preferences & Tastes

• Interest Rates

• Change in Population

• Government Intervention

Disposable Income

Income earned by household contribution to production minus tax. Think of this as the purchasing power – it can increase or decrease. Income earned and changes in tax rates will change your disposable income. 

Signs of increases in disposable income are increase in expenditure on goods and services.

Signs of decrease in disposable income are decreases in expenditure on goods and services.

Consumer Sentiment

Spending levels heavily influenced by consumer perceptions of future economic climate and conditions - about future income levels or job prospects.

Negative consumer sentiment results in higher levels of savings, they reduce spendings and increase savings.

Positive consumer sentiments results in higher levels of spending, reduce savings and spend.

Price of Substitute

Similar products that provide a similar or the same benefit to consumers – homogenous.

If the price of one changes it will change the demand for the substitute which is relatively cheaper.

Price of Compliment

Products typically consumer together are considered complimentary. If the price of one changes it will change the demand of the other, because if consumers purchase one they need to purchase the other.

Changes in preferences & tastes

Products go in and out of fashion. Tastes at the time will change demand. Preferences and tastes are influenced by behavioural economics.

If something is fashionable it will have increased demand and see a positive shift in the demand curve,

If something is unfashionable it will decrease demand and see a negative shift in the demand curve.

Interest Rates

Cost of borrowing. Credit or finance (money loaned) leads to changes in available cash for household spending (discretionary spending), as it must be repaid with interest which reduces income and therefore demand for goods decreases.

Decreases discretionary income and therefore reduces overall demand for g & s, increases the cost of servicing borrowed money.

Increases discretionary income and therefore increases overall demand for g & s, decreasing the cost of servicing borrowed money.

Change in Population

A larger population size will necessarily increase the demand for a wide range of goods and services, as they are required to support an increasing number of households. 

Increase in population causes and increase in the demand of most g & s, likely put pressure on price levels.

Decrease in population will reduce demand for g & s, may create supply-side pressures

Government Intervention - Demand

Governments intervene to affect demand for g&s with the direct intention of shifting demand from one product to another – to change the allocation of resources from the production of some goods to others.

Laws, taxes, subsidies all attempt to change consumer behaviour.

Positive Demand Side Factors

• An increase in disposable income

• An increase in the price of a substitute product

• A decrease in the price of a complementary product

• Favourable changes in preferences/tastes

• A decrease in interest rates

• An increase in the size of population

• Favourable changes in population demographics

• An increase in consumer sentiment

• Favourable changes made by governments

Negative Demand Side Factors

• A decrease in disposable income

• A decrease in the price of a substitute product

• An increase in the price of a complementary product

• Unfavourable changes in preferences/tastes

• An increase in interest rates

• A decrease in the size of population

• Unfavourable changes in population demographics

• A decrease in consumer sentiment

• Unfavourable changes made by governments

Law of Supply

as the price of a product increases, the supply increases, and when the price decreases the supply decreases. There is a positive or direct relationship between price and quantity supplied

The supply curve

captures the positive or direct relationship between price and quantity supplied.

Contraction of Supply

A movement back down the supply curve is a contraction in supply. A lower price discourages producers and causes them to decrease supply in the market over time.

Expansion of Supply

A movement up along the supply curve is an expansion of supply. A higher price encourages producers and causes them to increase production over time.

Non-price factors of Supply

• Specific costs of production

• Technology change

• Productivity growth

• Climate conditions

• Government Intervention

• Other Economies (Disruptions

Specific Production Costs

Cost of labour, capital, materials.

When the cost of resources increases these are seen as less favourable supply-side conditions. They decrease the amount firms are willing to supply at a given price.

Technology Change

When producers install new technology, it results in the production of a greater volume of goods and / or services.

Productivity Growth

The ability to convert inputs to products. Total output per unit input. Increases in productivity effectively reduce cost of production. Total volume output/hours worked.

Climate Conditions

When supply is affected by ability Climatic conditions and significant natural disasters place pressure on resource availability. When money goes to clean-up efforts, this also has economic implications

• Droughts

• Cyclones

• Floods

• Favourable Conditions

Government Intervention - Supply

Governments intervene to affect supply for g&s with the direct intention of shifting supply to change the allocation of resources from the production of some goods to others.

Taxes, costs of compliance with laws and regulations, government subsidies.

Other Disruptions

Such as pandemics or wars

Movement Along the Supply Curve

Higher or lower prices are the only factor causing a change in supply = movement along the supply curve.

Remember, the supply curve depicts the relationship between price of product and quantity supplied (law of demand) and thus determines the slope of the curve (elasticity).

Shifts in the Supply Curve

non price factors also change the supply of products, but do so independently of price.

Remember all factors cause a change in the cost of production or availability and/or quality of inputs.

Positive Supply Side Factors

• Lower costs of labour or capital

• Cheaper inputs costs

• Improvements in technology

• Productivity growth

• Improved climatic conditions

• Reduced regulatory burden imposed by governments

• Lower government taxes or increases subsidies

Negative Supply Side Factors

• High costs of labour or capital

• More expensive inputs costs

• Improvements in technology

• Slower or negative productivity growth

• A deterioration in climatic conditions

• A greater regulatory burden imposed by governments

• Higher government taxes or a reduction in subsidies