How does Competition affect price, S & D? An illustrated example

A tale of two muffins To illustrate the balance between price, supply, and demand, I will use two bakeries as an example. For easier understanding, the texts are color-coded, red for anything that relates to store “L” and blue if it’s related to store “R”

All three elements (P, S, D) are in balance; In a state of Equilibrium Assume: these two stores are the only two stores this community has access to. the quality is exactly the same. Store “L” Store “R” Price  Demand  Supply All three elements (P, S, D) are in balance; In a state of Equilibrium = $1.50 $1.50 = Customers =

< = Store “L” Store “R” = $1.50 = $2.25 $1.50 = Customers One day, store “L” owner decides to raise the price of the muffins to make more profit. Store “L” Store “R”   Price  Demand  Supply  Since the price of the muffin went up, customers who usually buy from store “L” decides to purchase from store “R” instead; leaving store “L” with lots of muffins left over. = $1.50 = $2.25 $1.50 = Customers < =

Since the store “L”s price drops, the demand for the muffins increase. Since store “R” has way more customers than before, the supply of the muffins go down and because of that, the store “R” owner raises the price.  Store “L” Store “R” Supply  Price  Demand   On the other hand, the store “L” owner lowers the price of the muffins since less people purchase it and there are lots of muffins left over. Since the store “L”s price drops, the demand for the muffins increase.   Supply  Price  Demand  = $2.25 = $1.75 $2.00 = $1.50 = Customers < >

Since the store “R”s price drops, the demand for the muffins increase. Since store “L” has way more customers than before, the supply of the muffins go down and because of that, the store “L” owner raises the price.   Store “L” Store “R” Demand  Supply  Price  On the other hand, the store “R” owner lowers the price of the muffins since less people purchase it and there are lots of muffins left over. Since the store “R”s price drops, the demand for the muffins increase.  Demand  Supply  Price   $2.00 = $1.50 = = $2.00 = $1.75 Customers >

You might have noticed a pattern in the past few slides.

This cycle: 1.   Price  Demand  Supply  2.   Supply  Price  Demand 3.    Demand  Supply  Price  4.   Price Demand  Supply  This pattern cycles through many times but the difference slowly gets smaller and smaller every time, until the equilibrium is restored.

Kind of like a swing Imagine the center of the swing as the equilibrium. The swing will go back and forth, but eventually, it will come to a stop at the centre.

Same with economy. Price, demand and supply will eventually get back in balance, restoring equilibrium.

Monopolies vs Supply and Demand

Monopoly vs competition So, we have explored how Competition between companies can affect Market (and mixed) Economies via Supply and Demand But what about Monopolies? https://www.youtube.com/watch?v=yOjI-4S6TUA

Key terms MONOPOLY: A monopoly is any business that is the sole producer or distributer of a good or service Consider the Board Game. How do you win Monopoly?

Monopolies – good or bad?? What could be some possible problems with having Monopolies? What could be benefits of having Monopolies?

https://youtu.be/z-pv6rBUI5Q

Monopoly vs competition Pg. 213