Supply and Demand - Competitive Markets

Topic 1: Supply and demand

Competitive markets

A MARKET is the group of buyers (demand) and sellers (supply) of a particular good or service. There are different types of markets and they can be highly organized (agricultural commodities) or less organized (ice cream market).

A COMPETITIVE MARKET is a market in which there are so many buyers and so many sellers that each has limited control over the price, as similar products are offered by others.

To be PERFECTLY COMPETITIVE (highest form of competition), a market has to have 2 characteristics:

1. The goods offered for sale are exactly the same.
2. Buyers and sellers are so numerous that no single buyer or seller has any influence over the market price.

IMPERFECTLY COMPETITIVE:

* Monopoly -> There is only one seller, who sets the price.

There are other types of markets between the monopoly and the perfectly competitive market.

Theory of competitive markets (Theory of supply and demand)

Demand

The demand or quantity demanded is the amount of a good that buyers are willing and able to purchase. The price of the good is the main determinant of the quantity demanded (Law of demand: If the other variables are constant,  and )[pic 1][pic 2]

To represent the demand of a good, we use the agents’ distribution table, which indicates the number of buyers and their buying price, and allows us to create:

• The Demand schedule: Table that shows the relationship between the price of a good and the quantity demanded, holding constant everything else that influences how much of the good costumers want to buy.
• The Demand curve: Graph of the relationship between the price of a good and the quantity demanded.

Supply

The supply or quantity supplied of a good is the amount of good that sellers are willing and able to sell. The price of the good is the main determinant of the quantity supplied. This means, it follows the law of supply: if everything else remains constant, , and .[pic 3][pic 4]

To represent the supply of a good, we use the agents’ distribution table, which indicates the number of suppliers and the selling price, and allows us to create:

• The Supply schedule: Table that shows the relationship between the price of a good and the quantity supplied, holding constant everything else that influences how much of the good costumers want to buy.
• The Supply curve: Graph of the relationship between the price of a good and the quantity supplied.