Market functioning

Competitive markets

All the sellers are selling the same commodity; we are looking at the market with a standard good, its quality is the same across different sellers.

There is also the variable of the numbers of sellers and buyers ???

In a competitive market, the price of the good cannot be affected by any of the sellers or any of the buyers.

What shapes a competitive market are demand and supply

Equilibrium price: the standard price at which all the goods are sold in a specific period



Demand

The demand power is the willingness and capacity of the buyers to buy a particular good.

The single individual wants to buy some good at a price x every time t, if the prices becomes 2x the frequency of his purchases will become t/2.
The same is valid for quantity.

As the price falls, the demand quantity rises.

Changes in quantity demanded ≠ change in demand:

a change in demand shift the graph horizontally, while the change in quantity demanded affects the Δ.

A decrease in the demand shifts the curve to the left.
At the opposite, an increase in demand shifts the graph to the right.

What can increase or decrease the demand?

  • changes in prices of related goods
  • changes in the income of buyers
  • changes in tastes
  • changes in expectations
  • changes in the number of buyers


Substitutes

Two different goods are considered substitutes if a decrease in the demand of one of the two leads to the increase of the demand of the other one.

Complements

E.g. gasoline and cars: goods which are usually consumed together

Independent

Independent goods are considered independent with respect to others if there is no link in their relative markets.


Changes in income

Normal goods are the vast majority of goods: as the income of the buyers increases, the demand of a given good increases accordingly, and vice versa.

In the case of inferior goods, their demand increases if the income decreases, and vice versa. These are very specific cases which take place with very specific classes of products.


Changes in taste

Interests in a given good may change relatively to external influences, such as culture (interest in a topic) or season (some kinds of clothes).


Changes in expectations

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Changes in the number of consumers

Variations in the population of an economy influences the number of buyers of some good, hence changing the demand.

External shocks, the pandemic being the most prominent one, may strongly affect these changes.


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Summing up: examples of graphs of demand curves



Supply

Supply represents the behavior of the sellers.

The supply curve represent the ability and willingness of the seller to sell at a certain price.

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When the price increases, there is an incentive for firms to increase the production

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