note4 - Chapter 4 How Markets Work We have seen how trade...

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Chapter 4 How Markets Work We have seen how trade typically benefits people, ranging from individuals to countries. We now analyze how markets work – which is where most trade takes place. Competition A market is competitive if there is a lot of buyers and sellers. Perfect competition is when there are so many that the choices of any individual buyer or seller doesn’t affect the price in the market. The benefits of competition Competition is a huge benefit to consumers. For example, with competition, many producers are competing for your business. This means that the price of the product will tend to be low – that is, if one producer tries to charge a very high price, you will purchase the good from a producer who offers it at a lower price. Prices tend to be lower in markets where there are many suppliers of the good, than, when there are very few suppliers.
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Buyers have a demand for the product. Quantity demanded is how much an individual wants to buy. A key determinant of quantity demanded is price. The lower the price, the higher the quantity demanded. This follows from our assumption about marginal benefit. Recall we assumed that the marginal benefit of any good – the incremental benefit of consuming one more unit of the good – declines as the consumption of the good increased. Thus, the amount a person is willing to pay for each additional unit declines as well. This leads to a demand curve that shows that lower prices are associated with higher quantity demanded.
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