Economics Chapter on Market Structures

Market

• A market is a group of buyers and sellers interacting with the potential to trade
• Market types
  • Perfectly competitive markets: buyers and sellers take market price as given
  • Imperfectly competitive markets: individual buyers or sellers influence the price

Competitors in Market

• Perfectly Competitive Market:
  • Multiple buyers & sellers, each having a small market share
  • Homogeneous products
  • Free entry and exit from the market
  • Perfect information
• Imperfectly Competitive Market:
  • Limited number of sellers and/or buyers
  • Differentiated products
  • Barriers to entry and exit
  • Imperfect information
  • Examples: Monopoly, Oligopoly, Monopolistic competition

Types of Markets

• Monopoly: One seller controls the entire supply and sets the price
• Oligopoly: Few sellers, who may avoid aggressive competition to maintain high prices
• Monopolistic Competition: Many sellers offer similar but differentiated products

Demand

• Represents a consumer's desire to purchase goods and services and their willingness to pay a specific price.

Quantity Demanded

• The amount of a good buyers are willing and able to purchase

Factors that Determine Individual Demand

• Price: Higher price, lower quantity demanded; Lower price, higher quantity demanded.
• Income: Lower income, lower demand; Higher income, higher demand.
  • Normal Good: Demand increases with an increase in income
  • Inferior Good: Demand decreases with an increase in income
• Price of Related Goods:
  • Substitute Goods: Increase in price of one leads to an increase in demand for the other
  • Complement Goods: Increase in price of one leads to a decrease in demand for the other
• Taste: Individual preferences and trends influence demand

Law of Demand

• Quantity demanded falls when price rises, and vice-versa (other things equal).

Shifts in the Demand Curve

• Factors Shifting Demand Curve to the Right (Increase in Demand):
  • Increase in consumer income (for normal goods)
  • Decrease in the price of a substitute good
  • Decrease in the price of a complementary good
  • Favorable change in consumer taste
  • Expectations of future price increases
• Factors Shifting Demand Curve to the Left (Decrease in Demand):
  • Decrease in consumer income (for normal goods)
  • Increase in the price of a substitute good
  • Increase in the price of a complementary good
  • Unfavorable change in consumer taste
  • Expectations of future price decreases

Demand Schedule and Demand Curve

• Demand Schedule: Table showing relationship between price and quantity demanded
• Demand Curve: Graph showing relationship between price and quantity demanded

Market Demand vs. Individual Demand

• Market Demand: Sum of individual demands for a good at various prices.
• Individual Demand: Specific demand of one consumer for a good at different prices.

Supply

• Represents the amount of a good that sellers are willing and able to sell.

Quantity Supplied

• The amount of a good sellers are willing and able to sell at a specific price.

Factors that Determine Individual Supply

• Price: Higher price, higher quantity supplied; Lower price, lower quantity supplied
• Input Prices: Higher input prices, lower supply; Lower input prices, higher supply
• Technology: Advancements in technology lower production costs and increase supply
• Expectations: Expectations of future price increases lead to reduced current supply

Law of Supply

• Quantity supplied rises when price rises, and vice-versa (other things equal).

The Supply Schedule and Supply Curve

• Supply Schedule: Table showing the relationship between price and quantity supplied.
• Supply Curve: Graph showing the relationship between price and quantity supplied.

Market Supply vs. Individual Supply

• Market Supply: Sum of individual supplies of all sellers in a market.
• Individual Supply: Specific supply of one seller for a good at various prices.

Shifts in the Supply Curve

• Factors Shifting the Supply Curve to the Right (Increase in Supply):
  • Decrease in input prices
  • Technological advancement
  • Favorable weather conditions (for agricultural products)
  • Expectations of future price decreases
• Factors Shifting the Supply Curve to the Left (Decrease in Supply):
  • Increase in input prices
  • Technological setbacks
  • Unfavorable weather conditions (for agricultural products)
  • Expectations of future price increases

Putting Supply and Demand Together

• Market equilibrium is where supply and demand curves intersect
• Equilibrium price: Price that balances supply and demand
• Equilibrium quantity: Quantity supplied and demanded at the equilibrium price

Equilibrium on a Graph

• Surplus: Quantity supplied exceeds quantity demanded
• Shortage: Quantity demanded exceeds quantity supplied

Law of Supply and Demand

• Price adjusts to bring quantity supplied and demanded into balance

Analyzing Changes in Equilibrium

1. Identify whether the event shifts supply, demand, or both curves.
2. Determine which direction the curve shifts (left or right).
3. Use the supply-demand diagram to analyze the resulting changes in equilibrium price and quantity.

Expectations

• Expectations about future prices can influence current demand and supply decisions.

Demand Schedule and Demand Curve

• Demand schedule and demand curve visualize the relationship between price and quantity demanded.