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05mkt_sg - Chapter 5: Competitive Markets Chapter 5...

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Chapter 5: Competitive Markets Chapter 5 Competitive Markets CHAPTER SUMMARY This chapter discusses the conditions for perfect competition. It also investigates the significance of competitive equilibrium in a perfectly competitive market. It explains the meaning of excess demand and supply. To understand the complete effect of a shift in demand or supply, it is necessary to consider both sides of the market. Generally, the effect of any change in demand or supply depends on the elasticities with respect to price of both demand and supply. The time horizon is a key factor affecting the elasticities of demand and supply. Prices are more volatile and quantity adjustment takes relatively longer in industries where production involves substantial sunk costs. Finally, it is important to distinguish a receipt or payment from incidence. A payment or receipt can be shifted from one to the other side of the market. Incidence is fundamental and depends only on the elasticities of demand and supply. KEY CONCEPTS perfect competition short-run market equilibrium market equilibrium long-run market equilibrium excess supply cost and freight price excess demand ex-works price calculating equilibrium change incidence GENERAL CHAPTER OBJECTIVES 1. Introduce why the demand-supply framework is the core of managerial economics. 2. Describe the characteristics of perfect competition. 3. Determine market equilibrium, explain why it exists and how it may change. © 2001, I.P.L. Png and C.W.J. Cheng 1
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Chapter 5: Competitive Markets 4. Predict the impact of a change in demand and supply on market price and quantity in the short run and explain the dynamics involved in moving from an initial equilibrium to a new market equilibrium. 5. Calculate a short-run change in equilibrium price and quantity using elasticities. 6. Predict the impact of a change in demand and supply on market price and quantity in the long run and explain the dynamics involved in moving from an initial equilibrium to a new market equilibrium. 7. Calculate a long-run change in equilibrium price and quantity using elasticities. 8. Distinguish freight inclusive pricing and ex-works pricing. 9. Discuss the incidence on buyers and sellers given a shift in demand or supply. NOTES 1. Introduction. It is important to consider both demand and supply when predicting the impact of any change on price and quantity. Even though only one side of the market may be changing initially, it is necessary to consider the interaction with the other side to obtain a complete picture. 2. Demand- supply framework (perfect competition). (a) The demand- supply framework (perfect competition) is the core of managerial economics. It can be applied to address business issues in a wide range of markets, including goods and services, consumer as well as industrial products, and items sold in domestic and international markets. (b)
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This note was uploaded on 12/21/2011 for the course ECON 3014 taught by Professor Michaelshaw during the Spring '11 term at HKU.

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05mkt_sg - Chapter 5: Competitive Markets Chapter 5...

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