ECON 1 Chapter Notes - Chapter 4: Perfect Competition, Takers, Inferior Good
Chapter 4
Supply and demand are the forces that make market economies work. They determine the
quantity of each good produced and the price at which it is sold.
The terms supply and demand refer to the behavior of people as they interact with one another
in competitive markets.
A market is a group of buyers and sellers of a particular good or service. The buyers determine
the demand for the product and the sellers determine the supply of the product.
Markets have many forms
- some are highly organized (such as markets for many agricultural commodities). In
these markets buyers and sellers meet at a specific time and place where an auctioneer
helps set prices and arrange sales.
- More often they are less organized, nonetheless they form a market.
Competitive market is a term that is used to describe a market in which there are so many
buyers and sellers that each has a negligible impact in the market price. Each seller has limited
control over the price because other sellers are offering similar products, so they have little
reason to charge less than others and if they charge more buyers will buy from somewhere
else.
Perfectly competitive markets: the highest form of competition. A market must have 2
characteristics to achieve this form
1) The goods offered for sale are all exactly the same.
2) The buyers and sellers are so numerous that no single buyer or seller has any influence
over the market price.
Because buyers adn sellers in percetly competitive markets must accept the price the market
determines, they are said to be price takers.
Perfectly competitive market assumption applies perfectly to wheat market.
Some markets have only one seller, and that seller sets the price - this is called a monopoly.
And some fall in between these two extremes.
A perfectly competitive market is the easiest to analyze because
1) Everyone participating in the market takes the price as given by market conditions.
2) Applicable to other more complicated markets. Some degree of competition is present in
most markets and many of the lessons we learn from studying supply and demand
under perfectly competitive markets apply in more complicated markets as well.
Demand
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Document Summary
Supply and demand are the forces that make market economies work. They determine the quantity of each good produced and the price at which it is sold. The terms supply and demand refer to the behavior of people as they interact with one another in competitive markets. A market is a group of buyers and sellers of a particular good or service. The buyers determine the demand for the product and the sellers determine the supply of the product. Markets have many forms some are highly organized (such as markets for many agricultural commodities). In these markets buyers and sellers meet at a specific time and place where an auctioneer helps set prices and arrange sales. More often they are less organized, nonetheless they form a market. Competitive market is a term that is used to describe a market in which there are so many buyers and sellers that each has a negligible impact in the market price.
