Unit 2- The Competitive Market

2.1- Consumers and demands

Competitive market- no one person can control prices or stop someone from entering a market
Demand (D)- the quantity of goods and services consumers are willing and able to purchase at various prices
  * What changes demand:
    * Market size- if the number of consumers increases so does demand
    * Expectations by the consumer- if the price in the future is expected to increase, today's buyers’ demand will increase
    * Related prices-
      * if two items are substitutes and the demand for one increases so will the demand for the other
      * if two items are complements if the demand for one increases then the demand for another will fall
    * Income of consumers- if income decreases the demand for the expensive good will fall and the demand for the cheaper product will increase
    * Tastes and preferences- if the taste for a good falls so will the demand
Quantity demanded (QD)- the quantity of goods and services consumers are willing and able to purchase at a specific price
Demand Schedule- in a table format, show how much a person would purchase
Demand Curve- a graph showing the trend of prices and what quantity a person would buy
* Example curve:
Things that affect a demand curve:
* Substitution effect- when consumers notice a price change and change their behavior by substitution one good for another
* Income effect- when price changes lead consumers to feel like they have a different amount of income than they actually have and purchase a different quantity
The Law of Demand- When the price increases then the quantity demanded goes down, or when the price decreases then the quantity demanded goes up
Normal goods- regular goods, name brand
Inferior goods- generic brand, less expensive
Substitutes and complements in demand- two or more items that consumers will substitute for each other
*
Substitutes and complement in consumption- two or more items consumers will purchase together
*
Elasticity- how responsive consumers are to price changes
  * % change of quantity demanded/% change of the price
    * Elastic- the price changes and consumers change, greater than the absolute value of 1
    * Inelastic- the price changes and consumers don’t, less than the absolute value of 1
    * Unit elastic- right in the middle between elastic and inelastic, the value of 1

2.2- Producers and Supply

Supply (S)- the quantity of goods and services producers are willing and able to sell at various prices
  * What changes supply:
    * Technology- if technology improves the supply will increase
    * Competition- when there are more producers the supply increase
    * Producer expectations- if producers think the price of the product will go up in the future they will probably hold off on production
    * Input prices- items (labor) producers buy to produce their final goods, if the input prices rise the supply will fall
    * Related pries (Substitutes and Compliments)-
      * Substitutes of production- two or more goods and services that can be produced using the same resources
        * if the price and quantity supplied increase the supply of another product will fall
      * Compliments in production- two or more goods and services that can be jointly produced given the same resources
        * price and supply increase which also makes the supply of another product goes up
Quantity supplied (QS)- quantity producers are willing and able to sell at a specific price
* showed in a supply schedule (table format) or a supply curve (graph)
Law of Supply- when the price goes up the quantity supplied will also move up or when the price goes down the quantity supplied would go down
Supply curve:
* supply increases when the line moves right
* supply decreases when the line moves left

2.4- Types of business A

Sole proprietorship

Sole proprietorship- a business firm owned by one person or the proprietor
* common in small firms in health care, real estate, retail trade, agriculture, and the arts
* sole proprietors are usually doctors, dentists, lawyers, and accountants
How to start a sole proprietorship:
  * register business name
  * check and conform to regulations
  * obtain necessary licenses and permits
  * keep records and prepare tax forms
Advantages:
  * easy start-up
  * ease of decision making
  * ownership of profits
  * tax benefits
  * intrinsic rewards
Disadvantages
* the burden of responsibility difficulty raising funds
* unlimited liability

Partnerships

Partnership- a for-profit business firm owned by two or more people or partners who have a financial interest in the business
* many small and large firms are partnerships
Partnership agreement- a written document that identifies the roles, responsibilities, and obligations of partners
General partners- share full financial and decision-making responsibility
Limited partners- invests money in the partnership but does not share decision-making or financial responsibility
Advantages of partnerships:
* a larger pool of financing
* shared decision making
Disadvantages of partnerships
* unlimited liability for general partners
* disagreement among partners

Corporations

Corporation- a business firm that is itself a legal entity
a corporation can own things like a person does
* property, enter into contracts and other businesses, and bring lawsuits
owned by stockholders who buy shares of stock
Private corporation- a corporation that’s stocks are owned by a small group of people
Public corporation- shares are held by many people and can be freely bought and sold
a corporation can be high risk so there are rules in place
* corporate charter or certificate of incorporation- states how a corporation will raise money to finance the start-up costs
Structure: stockholders, board ‘of directors, top corporate officers, vice presidents, supervisors/ department heads, and finally rank and file employees
Advantages:
  * limited liability for stockholders
  * ability to raise funds by using shares
  * ability to raise funds by issuing bonds
  * rapid growth
Disadvantages
  * expensive start-up costs
  * delays in decision making
  * low nonmonetary rewards
  * divided ownership of profits
  * tax treatment

Other business types

Limited Liability Company- a hybrid business organization that combines features of corporations, partnerships, and sole proprietorships
  * have limited liability
  * easier to form than a corporation
  * avoid double taxation of profit
Business Franchises- consists of a parent company and numerous associated businesses that sell a standardized good or service
* the franchisor owns the rights to the goods
Cooperative- a business owned by members and operated to supply members and others with goods and services
Nonprofit Organizations- a legal entity formed to carry out a not-for-profit mission

How businesses grow

Income investment- lists a business revenue, expenses, and profit over some time period
selling stocks
Merger- two firms legally join together to form a single large firm
Acquisition- purchase by one firm of a controlling interest in another firm
Horizontal merger- combines two firms that produce the same type of product
Vertical merger- combines firms that operate at different stages in the production of a good
Conglomerates- a single business enterprise formed by combining firms from unrelated industries
Multi-national corporation- a company that operated in more than one country

2.4- Types of Business B

Competitive markets

everyone has jobs
central planning can lead to shortages of consumer goods
Productive efficiency- products are produced at the lowest price
Allocative efficiency- production represents consumer preferences
Price signals- how producers see what to make and who to distribute them to
producers can’t be better off if consumers aren’t better off
Public economics- regulations of products by the government
Price gouging- a raise of the price of necessary goods in times of prices
* some regulations
* can increase import
Below-cost pricing- when producers can sell things for a such low price it takes other businesses out of the market
* can later increase prices when no other producers are producing

Monopolies

Pure monopoly- a market controlled by one seller with a good or service that has no close substitutes
* Crony capitalism- limiting the number of producers so people are forced to buy from one seller
high start-up costs and a lack of resources can start monopolies
Anti-trust laws- increase competition and limit the ability to have complete control
Vertical integration- when a company directly owns its supply chain, can also prevent companies from making anti-competitive deals with supplies
Patents- allow a monopoly for a limited amount of time
Natural monopoly- where it is more helpful to have one group own all production, often regulated by the government
Deregulation- the process of removing some regulations
Price discrimination- charging different rates to different consumers, can charge consumers of producers

Competition or game theory

Perfect competition- easy to get in the market, no one has control over the price
Monopoly- complete control over price because it is difficult to enter the market
Monopolistic competition- a market with many producers and relatively low barriers, their products are similar but not identical
Oligopoly- a market that has high barriers to entry and is controlled by a few large companies

Oligopoly

sell products that are similar but not identical
Non-price competition- distinguish their product but not by price, design, look, service
* advertising
oligopoly use game theory to stand out from their competitors
* hard to use self-interest while outdoing competitors
need to differentiate
Cartel- producers cell for the same high price, split customers
Collusion- a secret agreement or cooperation especially for an illegal or deceitful purpose
Price leadership- when one producer changes their price and other producers have to decide to change prices as well
Pay-off matrix- shows how much producers would make based on other producers’ prices

2.3 Price determination

Price determination- the price a product is sold for
there is no single person that can control the market
Equilibrium- the point at which quantity demanded = quantity supplied
* when the price is higher than the equilibrium, there is a surplus
* when the price is lower than the equilibrium, there is a shortage
Controls- when the government sets up situations or imposes controls where things are not at equilibrium
Quantity controls- times where the government imposes how much of something there can be (aka a quota)
* by implementing controls, we run the risk of shortages/surpluses, because there
are always tradeoffs