Markets and Competition

What is a Market?

• Market → A group of buyers and sellers of a particular good or service

  • Buyers determine the demand for a product, while the sellers determine the supply of a product.

• Markets take many forms.

  • Some markets are organized, like the market for agricultural commodities.

    • In these organized markets, buyers and sellers meet at a specific time and place. An auctioneer also helps set prices and arrange sales.

  • Some markets are less organized, such as the market for ice cream.

    • Buyers of ice cream do not meet together at one time, and sellers can be seen in different locations with different products. There is also no auctioneer setting the price for each ice cream.

    • Even though this market is not organized, ice cream buyers and sellers still form a market.

What is Competition?

• Competitive Market → A market in which there are many buyers and sellers, and each has an impact on the market price.

  • For example, the market for ice cream is highly competitive. Buyers know that there are many ice cream sellers, and sellers are also aware that they offer similar products as other sellers.

    • As a result, the price and quantity of ice cream sold is determined by all the buyers and sellers interacting in a marketplace, not just a single buyer or seller.

• A Perfectly Competitive Market has two characteristics:

  • The goods offered for sale are all exactly the same

  • The buyers and sellers are so numerous that no single buyer or seller has any influence over the market price

• Buyers and sellers in a Perfectly Competitive Market are Price Takers because they must accept the price the market determines.

• However, not all goods and services are sold in competitive markets.

  • Monopoly → In this market, there is only one seller. This singular seller sets the market price.

  • Other markets fall between the extremes of Perfect Competition and Monopoly.

Demand

• Quantity Demanded → The amount of a good that buyers are willing and able to purchase.

• Law of Demand → States that, other things being equal, the quantity demanded of a good falls when the price of the good rises.

The Demand Schedule

• The Demand Schedule → A table that shows the relationship between the price of a good and the quantity demanded.

The Demand Curve

• The Demand Curve → A graph of the relationship between the price of a good and the quantity demanded.

• By convention, the price of the good is on the vertical axis, while the quantity demanded of the good is on the horizontal axis.

  • The Demand Curve is downward-sloping.

    • Because, all other things being equal, a lower price means a greater quantity demanded.

Market Demand vs. Individual Demand

• The demand curve in Figure 2 only shows an individual’s demand for a product.

  • To analyze the market, we need to determine the market demand for a

• Market Demand → The sum of all the individual demands for a particular good or service.

• Market Demand Curve → Shows how the total quantity demanded of a good varies as the price of the good varies, all other factors held constant.

Shifts in the Demand Curve

• If something happens to alter the quantity demanded at any given price, the demand curve shifts.

  • Increase in Demand → The Demand Curve shifts to the Right.

  • Decrease in Demand → The Demand Curve shifts to the Left.

• Any change that raises the quantity demanded of a good shifts the demand curve to the right. On the other hand, any change that lowers the quantity demanded of a good shifts the demand curve to the left.

Variables that Shift the Demand Curve

1. Income

   • When income falls, the quantity demanded for a good usually falls as well.

     • As your income decreases, you would have less money to spend.

   • If the demand for a good falls when income falls, the good is called a Normal Good.

     • On the other hand, when income increases, the demand for a Normal Good increases as well.

   • However, not all goods are normal goods. If the demand for a good rises when income falls, the good is called as Inferior Good.

     • On the other hand, when income increases, the demand for an Inferior Good decreases.

2. Prices of Related Goods

   • Substitutes → Two goods for which an increase in the price of one leads to an increase in the demand for the other.

     • For instance, it can be said that the chicken and beef are substitutes for one another. When the price of chicken rises, consumers will opt to buy the cheaper substitute, beef.

   • Complements → Two goods for which an increase in the price of one leads to a decrease in the demand for the other.

     • Complements are usually pairs of goods that are used together, such as peanut butter and jelly. When the price of peanut butter increases, the demand for jelly will decrease as well.

3. Tastes

   • This is the most obvious determinant for demand.

     • If you like a certain good, you will buy more of it.

4. Expectations

   • Expectations about the future may affect your demand for a good or service at present.

     • For instance, if you expect the price of a good to fall tomorrow, you may be less willing to buy it for today’s price.

5. Number of Buyers

   • Market demand also depends on the number of buyers.

     • For instance, if the population of a town increases from 2,000 to 3,000, there would be 1,000 more consumers. As such, the quantity demanded in the market would be higher at every price, and market demand would increase.

Supply

• Quantity Supplied → The amount of a good or service that sellers are willing and able to sell

• Law of Supply → States that, other things being equal, the quantity supplied of a good rises when the price of a good rises

The Supply Schedule

• The Supply Schedule → A table that shows the relationship between the price of a good and the quantity supplied.

The Supply Curve

• The Supply Curve → A graph of the relationship between the price of a good and the quantity supplied.

• By convention, the price of the good is on the vertical axis, while the quantity supplied of the good is on the horizontal axis.

  • The Supply Curve is upwards-sloping.

    • Because, all other things being equal, a higher price means a greater quantity supplied.

Market Supply vs. Individual Supply

• Just like the demand curve, the supply curve only shows an individual seller’s supply of a product.

  • To analyze the market, we need to determine the market supply for a good or service.

• Market Supply → The sum of all the sellers’ supplies for a particular good or service.

• Market Supply Curve → Shows how the total quantity supplied of a good varies as the price of the good varies, all other factors held constant

Shifts in the Supply Curve

• If something happens that alters the quantity supplied at any given price, the supply curve shifts.

  • Increase in Supply → The Supply Curve shifts to the Right.

  • Decrease in Supply → The Supply Curve shifts to the Left.

• Any change that raises the quantity supplied of a good shifts the supply curve to the right. On the other hand, any change that lowers the quantity supplied of a good shifts the supply curve to the left.

Variables that Shift the Supply Curve

1. Input Prices

   • When the price of one or more inputs rise, producing a good becomes less profitable, so supply falls.

   • Thus, the supply of a good is negatively related to the price of inputs used in making it.

2. Technology

   • The invention of new technologies can reduce the amount of labor necessary in creating a product. This reduces production costs, and increases supply.

3. Expectations

   • The amount of a production a firm decides to produce today may also depend on their expectations about the future.

     • For instance, if a firm expects production costs to fall next month, they may be less willing to produce the good at present, decreasing supply.

4. Number of Sellers

   • Market demand also depends on the number of sellers.

     • For instance, if an ice cream company were to go out of business, the supply of ice cream in the market would decrease.

Equilibrium

• Equilibrium → Occurs when the market price has reached a level at which quantity supplied equals quantity demanded

• Equilibrium Price → The price at the intersection where quantity supplied is equal to quantity demanded

  • This is also sometimes called the market-clearing price because it satisfies everyone in the market, implying that buyers have bought all that they wanted to buy and sellers have sold all they wanted to sell.

• Equilibrium Quantity → The quantity supplied and the quantity demanded at the equilibrium price

• Law of Supply and Demand → States that the price of any good adjusts to bring the quantity supplied and quantity demanded for that good into balance.

  • In instances where quantity supplied and quantity demanded are not equal (like in Surplus and Shortages), prices will adjust until equilibrium is reached.

    • **Surplu**s → A situation where the quantity supplied is greater than the quantity demanded.

      • In a Surplus, prices will continue to fall until the market reaches equilibrium.

    • Shortage → A situation where the quantity demanded is greater than the quantity supplied.

      • In a Shortage, prices will continue to rise until the market reaches equilibrium.

Three Steps to Analyzing Changes in Equilibrium

1. Decide whether the event shifts the supply or demand curve (or perhaps both).

2. Decide in which direction the curve shifts.

3. Use the supply-and-demand diagram to see how the shift changes in equilibrium price and quantity.

Shifts in Curves vs. Movement Along Curves

• A Shift in the Supply Curve → is a Change in Supply

• A Shift in the Demand Curve → is a Change in Demand

• A Movement Along the Fixed Supply Curve → is a Change in the Quantity Supplied

• A Movement Along the Fixed Demand Curve → is a Change in the Quantity Demanded

Events that Might Affect the Market for a Certain Good

A Change in the Market Equilibrium Due to a Shift in Demand

• Any event that increases quantity demanded at any given price shifts the demand curve to the right.

  • Thus, the equilibrium price and the equilibrium quantity both rise.

A Change in the Market Equilibrium Due to a Shift in Supply

• Any event that decreases quantity supplied at any given price shifts the supply curve to the left.

  • Thus, the equilibrium price rises and the equilibrium quantity falls.

A Change in the Market Equilibrium Due to Shifts in both Demand and Supply

• Two outcomes are possible:

  • Both the equilibrium price and the equilibrium quantity will rise.

  • Equilibrium price rises, but the equilibrium quantity falls.