Ch4 - Chapter 4 The Market Forces of Demand and Supply...

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Chapter 4: The Market Forces of Demand and Supply Market Structure: Refers to the way in which a market is organized. Economist focus on the following characteristics of a market: (1) the number of buyers and sellers – this gives information on market power. (2) The type of product produced by suppliers – is the product homogeneous (i.e. identical in every single way such as corn from Farmer Jane or Farmer Miguel) or differentiated (similar but not identical, such as the various brands of soda or toothpaste) (3) Entry/Exit barriers — is it relatively costless to enter or exit a market? For example, if you produce airplanes, then the startup cost is likely to be very high but if you are a hotdog vendor, the startup cost is likely to be very low. The text identifies the two extremes in market structure: perfect Competition and Monopoly. In between you have Monopolistic Competition and Oligopoly. The table below summarizes the features of the markets. Feature Perfect Competition Monopolistic Competition Oligopoly Monopoly Number of buyers and sellers: Many buyers and many sellers so that no one agent has market power. Many buyers. Many sellers but seller has some market power because each seller is selling a unique product. Many buyers. Few dominant sellers who have market power Many buyers. Single supplier Type of product: homogeneous differentiated Either homogeneous or differentiated There is only one product Entry/Exit barriers: Virtually costless entry and exit Low entry/exit barriers High entry/exit barriers High entry/exit barriers Examples: Pure commodities such as corn, wheat, barley sold in world commodity markets, Strawberries 9sold in green flats often used as an example) Soda, Toothpaste, Jams, Jeans, Designer Coffee This is probably the most common market structure in the US. Just think of the different brands of products in a supermarket Automobile industry (few big names), Public Accounting firms, Cigarettes, Airplanes Utilities Demand and Quantity Demanded; Supply and Quantity Supplied I cannot emphasize enough the importance of understanding the distinction between the terms demand and quantity demanded. In layperson speak, we tend to say, price has increase and demand has fallen. In fact, news articles are full of such phrases. But in economics, that phrase is incorrect and strictly speaking, in mathermatically, it is also incorrect, given the demand curve and the variables on the axes. Please read the workbook, pg. 19. The same applies to supply and quantity supplied (workbook, pg. 20)
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Workbook Practice Question 1, Page 25 The Market for Corn (in millions of bushels) Price Q d Q s Q s ' $6.00 220 400 460 5.50 240 360 420 5.00 260 320 380 4.50 280 280 340 4.00 300 240 300 3.50 320 200 260 3.00 340 160 220 b. The equilibrium price of corn is $4.50 and the equilibrium quantity traded is 280 million bushels. c.
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This note was uploaded on 05/10/2010 for the course ECON 220 taught by Professor Ramoo during the Spring '10 term at Diablo Valley College.

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Ch4 - Chapter 4 The Market Forces of Demand and Supply...

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