Knowt
ch4 business econ
Chapter Overview
What is a competitive market?
What factors affect buyers' demand for goods?
What factors affect sellers' supply of goods?
How do supply and demand determine price and quantity sold?
How do changes in factors affecting demand or supply impact market price and quantity?
What is the role of prices in resource allocation?
Competitive Markets
A competitive market is defined as a group of buyers and sellers of a specific product. The characteristics that define competitive markets are:
Many buyers and sellers, each having negligible effect on price.
All goods are identical.
Participants are "price takers".
Examples of competitive markets include fish markets, where multiple buyers and sellers interact with similar fish stocks, and electronics retail districts, which have similar conditions but varied electronic goods.
Demand
Quantity Demanded: Amount buyers are willing and able to purchase.Law of Demand: Quantity demanded falls as price rises (ceteris paribus).Demand Schedule: A table showing price vs quantity demanded (example: Helen's demand for lattes).Market Demand vs Individual Demand: Market demand is the sum of individual demands at each price level.Demand Curve Shifters:
Number of buyers
Income levels (normal vs. inferior goods)
Prices of related goods (substitutes and complements)
Tastes and preferences
Expectations of consumers
The demand for goods can shift due to various factors, such as changes in consumer income, preferences, and the number of buyers in the market. For instance, if the income level rises, consumers may demand more normal goods, thereby shifting the demand curve to the right.
Supply
Quantity Supplied: Amount sellers are willing and able to sell.Law of Supply: Quantity supplied rises as price increases (ceteris paribus).Supply Schedule: A table showing price vs quantity supplied (example: Starbucks’ supply of lattes).Market Supply vs Individual Supply: Market supply is the sum of individual supplies at each price level.Supply Curve Shifters:
Input prices
Technology advancements
Number of sellers
Expectations of future prices
Factors that influence supply include shifts in input prices or advancements in technology. For instance, if the price of coffee beans rises, the supply of lattes from Starbucks may decrease, resulting in a leftward shift in the supply curve.
Equilibrium
Definition: Price at which quantity supplied equals quantity demanded.Surplus: Occurs when quantity supplied exceeds quantity demanded, leading to price reduction.Shortage: Occurs when quantity demanded exceeds quantity supplied, leading to price increase.
Equilibrium affects how prices are set in the market. For example, when a surplus occurs in a competitive market, it typically prompts sellers to lower prices in order to increase sales and eliminate excess stock. Conversely, a shortage will likely cause prices to rise as consumers compete for the limited supply.
Analyzing Market Changes
To analyze market changes, one must follow these steps:
Identify which curve shifts (supply or demand).
Determine the direction of the shift.
Assess the impact on equilibrium price and quantity.
Conclusion
Competitive markets fundamentally rely on the supply and demand model. Overall, prices serve as essential guides for economic activities and play a crucial role in the effective allocation of resources.
