Chapte4 - Chapter 4 1 Price Determination in competitive markets a Competition means no buyer or seller can influence the price of the product

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Chapter 4 1) Price Determination in competitive markets a) Competition means no buyer or seller can influence the price of the product. Price, and the basic economic questions discussed in Chapter 2, are determined by overall market conditions. b) This implies many buyers and sellers, none holding any degree of monopoly power in the market. c) At the other extreme is pure monopoly (one seller) and markets with “price rivalry” where, due to a market having only a few sellers, the price change one seller makes will influence competitors to make similar changes. An example of this is the price wars that occasionally take place in the airline industry. 2) Demand Curves a) Demand is a set of relationships between price and quantity, from the consumer’s perspective. In other words, it shows what quantity people will choose to purchase at each of several possible prices, within a specific period of time. (1) The logical direction of the Demand Curve is downward-sloping (inverse relationship between price and quantity) because if nothing changes in the market except price has decreased, we normally expect people to purchase more of the good. b) This assumption that “nothing else changes in the market” is referred to commonly in economics as “ceteris paribus”, and it allows us to deal with the effect of a designated change in the market (e.g. price decrease) while holding all other influential market factors constant. c) For demand, these other factors are: Buyers’ income Buyers’ taste and preferences Price of complements and substitutes Buyers’ expectations of future market conditions Number of buyers in the market d) Using the Ceteris Paribus assumption, all market factors are held constant, and we then can deal with the change in only one. e) Charting Demand (1) Demand Schedule: A table that simply lists the quantity purchased at each specific price. (2) Demand Curve: a graph that shows the line going through the points listed on the Demand Schedule f) Law of Demand: Consumers buy more at relatively low prices than at relatively high prices (ceteris paribus). There are two reasons the quantity of a good demanded inversely relates to its price:
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This note was uploaded on 08/04/2008 for the course ECON 1A taught by Professor Patyk during the Spring '08 term at Foothill College.

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Chapte4 - Chapter 4 1 Price Determination in competitive markets a Competition means no buyer or seller can influence the price of the product

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