Deck 2 (Jan 24 & 31)

Overview of Competitive Markets

Paul Grootendorst

PHM213 Health Economics and Pharmacoeconomics

Winter 2025

Agenda

  • Questions addressed by markets:

    • How much should we make?

    • How should we make it?

    • How much should each person get?

  • Types of markets:

    • Competitive markets

    • Monopoly and others

Focus on Prices in Competitive Markets

  • Understanding:

    • Supply and demand curves

    • Market equilibrium

  • Economic behavior related to:

    • Consumers

    • Producers

Optional Readings

  • Wheelan, C. Naked Economics. Chapter: The Power of Markets.

  • Krugman, P., Wells, R. Microeconomics. Chapter: Supply and Demand.

  • Kneebone, R. D., Mankiw, N. G., McKenzie, K. J. Principles of Microeconomics. Selected chapters and pages.

How to Use a Country’s Scarce Resources

Core Questions

  1. How much should we make?

  2. How should we make it?

  3. How much should each person get?

  • Markets answer these questions effectively.

Things Exchanged in Markets

  • Exchanged items include:

    • Goods and services from firms (consumed by households or other firms)

    • Labour from households (used by firms)

    • Capital (savings from households) used for investments

Household Roles in the Market

  • Households:

    • Supply labor and receive wages

    • Supply savings and receive returns

    • Use income to purchase various goods and services

Decision Making in Households

  • Households often collectively decide on:

    • Employment (e.g., working parents evaluating childcare options)

    • Timing of significant purchases (e.g., vehicle or home)

Firms' Roles in the Market

  • Firms will:

    • Buy labor and other inputs

    • Use funds from savings and earnings for investments

    • Produce goods/services to sell into the market

Markets and Resource Allocation

  • Markets:

    • Establish resource allocation through voluntary exchanges

    • In some systems (e.g., central planning), governments directly control allocation

    • Market prices signal demand and supply adjustments

Competitive Market Characteristics

  • Features of competitive markets include:

    • Many buyers and sellers participate

    • Goods/services are interchangeable

    • No government restrictions affecting buying/selling dynamics

Comparison of Market Types

  • Key distinctions between competitive markets and monopolistic structures:

    • Competitive firms have no pricing power - they are price takers.

    • Monopolistic firms can influence prices due to lack of competition.

Above Normal Profits

  • Profits exceeding the opportunity cost of alternative employment are termed "above normal" profits.

Examples of Non-Competitive Markets

  1. Monopoly: One seller controls supply (e.g., electric power distribution).

  2. Bilateral Monopoly: One buyer and seller interact (e.g., medical services negotiation in Ontario).

  3. Oligopoly: Few sellers exert pricing power (e.g., limited cell phone service providers).

Monopolistically Competitive Market

  • Firms have limited pricing power due to the presence of local competitors.

    • Example: Pharmacies with similar services may charge differing prices.

Government Regulation Impacts on Profitability

  • Regulations can lead to sustained profits due to limited competition (e.g., egg industry quota systems).

Market Dynamics and Equilibrium

  • Market Equilibrium: Achieved when the supply equals demand without external pressures.

    • Changes in demand or supply can shift the equilibrium price and quantity.

Demand and Supply Relationship

  • Higher prices generally lead to increased supply and reduced demand (and vice versa).

  • Equilibrium occurs at the price where quantity demanded equals quantity supplied.

Price Adjustments in Market Equilibrium

  1. If prices exceed equilibrium, excess supply occurs, prompting price reductions.

  2. If prices fall below equilibrium, excess demand prompts price increases.

Overview of Demand and Supply Curves

  • Demand Curve: Represents consumers’ willingness to pay at various price levels.

  • Supply Curve: Reflects producers’ willingness to sell at various price levels.

Interpreting Market Demand and Supply Curves

  • Shifts in these curves indicate changes in market conditions (e.g., preferences, income, or costs).

Amir's Demand Behavior Example

  • Consumers make choices based on preferences (WTP) and prices of substitutes/complements.

Insights on Price Elasticity of Demand

  • Price elasticity dictates how responsive demand is to price changes; this has implications for revenue.

Conclusion on Competitive Market Dynamics

  • Individual market actors (households and firms) make decisions based on optimizing strategies related to prices, costs, and preferences.