EC4101 Week 03 Lecture 01 PDF

EC4101 Wk.03 Lec.01 A Competitive Market: One with many buyers and sellers of the same good/service, a market in which both buyers and sellers believe that their own actions have no effect on the market price. Perfect Competition: An environment where products/services are identical (homogenous, i...

EC4101 Wk.03 Lec.01 A Competitive Market: One with many buyers and sellers of the same good/service, a market in which both buyers and sellers believe that their own actions have no effect on the market price. Perfect Competition: An environment where products/services are identical (homogenous, in which there are numerous buyers and sellers so that each has no influence over prices. Monopoly: There is one producer who has control over the price of the good/service. There are many sellers who have slightly differentiated products, where each firm sets a price for its own product. Oligopoly: There are few sellers and firms generally rely on non-price competition. There is room for collusion among the sellers. The supply and demand model is one of how a competitive market works. It does not apply to monopolies or oligopolies. The model has 5 key elements: 1. A Demand Curve (Set by buyers) 2. A Supply Curve (Set by sellers) 3. Demand and Supply Curve Shifts 4. Market Equilibrium 5. Changes in the Market Equilibrium Demand: The quantity that buyers wish to purchase at each conceivable price. Demand Curve: Represents the behaviour of buyers. The demand curve shows the quantity demanded (the amount buyers are willing and able to purchase at a particular price) at various prices. A change in demand does not equal a change in quantity demanded. A change in demand can occur regardless of price, but a change in quantity demanded is typically associated with price. A change in demand results in a shift of the demand curve, a change in quantity demanded results in movement along the demand curve. There are multiple factors that can shift the demand for a product, including: Change of price in related goods and services: o Substitutes: Two goods are substitutes if a fall in the price of one good results in customers being less willing to buy the second.  o Complements: Two goods are complements if a fall in the price of one good results in customers being more willing to buy the second. Changes in income of the buyers: o Normal Good: Demand increases when income increases and vice versa. E.g. designer clothes. o Inferior Good: Demand decreases when income increases and vice versa. E.g. cheaper clothes. Changes in tastes: These are subjective and often vary among consumers. Changes in expectations: If you expect the price of the good to rise in the future, you will buy it now, and vice versa. E.g. buying diesel the day before it goes up in price. Changes in customer numbers: E.g. more babies = increased sale of baby clothes. Market Demand: The sum of all individual demand for a particular good/service. Excess Demand: Exists when the quantity demanded exceeds the quantity supplied at the ruling price. Formulas (From the Book Readings): Direct Demand Function = Q=a-b P, where Q is quantity demanded, a and b are positive constants and P is price. Inverse Demand Function: P=(-c/d) + (1/d) Q References: Notes based on EC4101 Lecture Slides and the relevant readings from Economics (12th Ed.) David Begg. Image 1: Corporate Finance Institution