Market-it is a place that brings buyers and sellers come together in order to transact business among themselves.
Market exists whenever and wherever buyers an seller interacts be it a physical location, email or any other platform that regulates transactions.
Conditions for market to function efficiently are:
- Large number of buyers and sellers acting idependently. This ensures the number of buyers and sellers has too much influence over the different products in the market.
- Perfect information about what is been traded in the market- this ensures that complete access to the cost of products and perfect knowledge.
- Freedom of entry and exit to and from the market-this increases the market’s efficiency by allowing the maximum number of buyers and sellers in the market in order to participate.
This is the situation whereby there is only one buyer for a product in the market
This is where there is basically only one seller for a product in the market.
A variety of the factors affect the supply and demand, which in turn will affect the price and the quantity of another good.
Changes in the market for one good will create a change in the market for another good.
Economists refer to firms as ‘price takers.
Unrealistic model explained.
When studying market, you begin by learning something that is somewhat unrealistic, but a simple model of perfect competition will help to understand real world conditions.
They are necessary for the functioning of an efficient market.
A large number of buyers and sellers acting independently according to their own self interest and the freedom of entry and exit to and from the market.
Identical products mean that there are no real differences in the output of the firm.
Advantages of competive markets.
- They are allocatively inefficient .
- Firms are encouraged to take cost savings by increasing productivity and innovation.
- Consumers benefit from lower prices, more choices and higher quality products.
- Firms in perfectly competive market compete on non-price factors such as quality of services which provide benefit for the consumer.
- Benefits relate to the efficient allocation of resources.
- When the firm does not set the price of its output, but instead sell its output at the market price.
Disadvantages of competive market.
- It establishes an idealized framework for establishing a market.
- Profit margins are also fixed by the demand supply -firms cannot this set themselves apart from set themselves apart from by charging premium for the prices and services.
- An expansion of production capabilities could potentially bring down costs for consumers and increase profit margins for the firm.
It is a theoretical market structure in which;
- All firms sell an identical product-the product is a commodity or an homogeneous.
- All the firms are price takers-they cannot influence the market price of the product.
- Market shares has no influences on the price of the product.
- Buyers have complete or perfect information- about the product been sold and prices charged being sold and prices charged by each firm.
- Resources for such as labor are perfectly mobile
- Firms can enter or exit the market without cost.
Exists whenever a market hypothetical or real, violates the abstract tenets of neoclassical
pure or perfect competition .
Two ways competition is used in economics
- perfectly competitive market structure
Competition as a process
a rivalry among firms that is prevalent throughout our economy
perfectly competitive market
a market in which economic forces operate unimpeded
Conditions for a perfectly competitive market
- both buyers and sellers are price takers
- the number of firms is large
- there are no barriers to entry
- Firms’ products are identical
- There is complete information
- Selling firms are profit-maximizing entrepreneurial firms
a firms or individual who takes the price determined by market supply and demand as given
Barriers to entry
social, political, or economic impediments that prevent firms from entering a market
Firms’ products are identical
each firm’s output is indistinguishable from any other firm’s output
Why is the assumption of no barriers to entry important for the existence of perfect competition?
without the assumption of no barriers to entry, firms could make a profit by raising price; hence, the demand curve they face would not be perfectly elastic and, hence, perfect competition would not exist
demand curve for perfectly competitive firm
perfectly elastic (horizontal)
How can the demand curve for the market be downward-sloping but the demand curve for a competitive firm be perfectly elastic?
The competitive firm is such a small portion of the total market that it can have no effect on price. Consequently, it takes the price as given, and, hence, its perceived demand curve is perfectly elastic.
marginal revenue (MR)
the change in total revenue associated with a change in quantity
the change in total cost associated with a change in quantities
When does a firm maximize profit?
Marginal revenue for a perfect competitor
Since a perfect competitor accepts the market price as given, marginal revenue is simply the market price.
What are the two things you must know to determine the profit-maximizing output
To determine the profit-maximizing output of a competitive firm, you must know price and marginal cost
MC=MR=P. So, if MR>MC, increase production; if MR<MC, decrease production. If MR=MC, the firm is maximizing profit
Why is the marginal cost curve the firm’s supply curve?
because the marginal cost curve tells us how much of a produced good a firm will supply at a given price. (the marginal cost curve is the firm’s supply curve only if price exceeds average variable cost)
Why do firms maximize total profit rather than profit per unit?
Firms are interested in getting as much for themselves as they possibly can. Maximizing total profit does this. Maximizing profit per unit might yield very small total profits.
Determination of profits by total cost and total revenue curve
Total profit is maximized where the vertical distance between total revenue and total cost is greatest.
what type of firm is the only firm that has a supply curve?
a competitive firm
When the ATC curve is below the marginal revenue curve, __
the firm makes a profit
When the ATC curve is above the marginal revenue curve, __
the firm incurs a loss
If a company is incurring a loss, why doesn’t it shut down?
The answer lies in the fixed costs. There’s no use crying over spilt milk. In the short run, a firm knows these fixed costs are sunk costs; it must pay them regardless of whether or not it produces. The firm considers only the costs it can save by stopping production, and those costs are its variable costs.
In the early 2000s, many airlines were making losses, yet they continued to operate. Why?
The marginal cost for airlines is significantly below average total cost. Since they’re recovering their average variable cost, they continue to operate. In the long run, if this continues, some airlines will be forced out of business
the point at which price equals AVC; that point below which the firm will be better off if it temporarily shuts down than it will if it stays in business.
industry demand curve for perfect competition
market supply curve
the horizontal sum of all the firms’ marginal cost curves, taking account of any changes in input prices that might occur. Since all firms in a competitive market have identical marginal cost curves, a quick way of summing the quantities is to multiply the quantities from the marginal cost curve of a representative firm at each price by the number of firms in the market.
market supply curve in the long run
As more firms enter the market, the market supply curve shifts to the right because more firms are supplying the quantity indicated by the representative marginal cost curve. Likewise, as the number of firms in the market declines, the market supply curve shifts to the left.
In the long run,
firms enter and exit the market and neither economic profits nor economic losses are possible. In the long run, firms make zero economic profit.
Why can’t firms earn economic profit or make economic losses in the long run?
Because of the entry and exit of firms: If there are economic profits, firms will enter the market, shifting the market supply curve to the right. As market supply increases, the market price will decline and reduce profits for each firm. Firms will continue to enter the market and the market price will continue to decline until the incentive of economic profits is eliminated. At that price, all firms are earning zero profit.
the amount the owners of business would have received in the next-best alternative
If a competitive firm makes zero profit, why does it stay in business?
The costs for a firm include the normal costs, which in turn include a return for all factors of production. Thus, it is worthwhile for a competitive firm to stay in business, since it is doing better than, or at least as well as, it could in any other industry.
If berets suddenly became the “in” thing to wear, what would you expect to happen to the price in the short run? In the long run?
Suddenly becoming the “in” thing to wear would cause the demand for berets to shift out to the right, pushing the price up in the short run. In the long run, the market is probably not perfectly competitive and it would likely push the price down because there probably are considerable economies of scale in the production of berets
Why is the long-run supply curve horizontal?
factor prices are constant and there are no constant returns to scale
In increasing-cost industries, the long-run supply curve is __
Why is the long-run supply curve more elastic than the short-run supply curve?
Because output changes are much less costly in the long run than in the short run. In the short run, the price does more of the adjusting. In the long run, more of the adjustment is done by quantity.