Competitive Markets.docx

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University of Calgary
Business and Environment
BSEN 401
William Huddleston

Competitive Markets Definition: Competition is Price Taking Analysis of competition dates from at least Aristotle. Adam Smith described competition as ‘many buyers and sellers’ in his revolutionary discussion of the benefits of competitive markets in his 1876 The Wealth of Nations, but it was only at the end of the nineteenth century that economists formulated the modern analytic definition. The modern definition captures Smith’s meaning that buyers or sellers cannot influence price in a competitive market. It also simplifies the analysis of competitive behaviour since households and firms respond to a given price with no ability to change that price. Imperfect competition occurs when a buyer or seller can influence price. The most extreme examples are monopoly (single seller), which we shall discuss later in the course, and monopsony (single buyer). We shall see that Demand and Supply determine price in a competitive market. DEMAND (function, curve, schedule) Definition: Demand is the quantities of goods and services demanded by consumers 1 (households) at each market price ceteris paribus. Demand is the relationship between 2 variables, price (P) and quantity demanded (q for the household and Q for the market), holding all other variables constant. The most important of the other variables are prices of other goods (Pi where ‘i’ represents one of n commodities), income (Y), and preferences (tastes). We can exp
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