Supply and Demand – Differing Market Structures UNIT 2 – LESSON 5

MARKET STRUCTURES Generally speaking market structures can be divided into two categories: competitive and concentrated. The demand and supply curves that you have looked at so far are for a competitive market structure.

Competitive Market Structure In a competitive market structure there are numerous small companies producing a product. It is easy for new companies to enter the market. Competition for customers is high and this keeps prices and profits low. Price is determined by the relationship between the total number of products supplied and the total number of products demanded.

NOTHING NEW….

DEMAND REVIEW If demand for the product is high, new producers are attracted to the market and competition intensifies. In a competitive market structure, the demand of the consumers sets the price and the producers have little control. They are called ‘price takers’ because they have to take whatever price they can get.

SUPPLY REVIEW A higher price will lead to a higher quantity supplied in a competitive market. The incentive for the producer is to produce as much product as possible as efficiently as possible and sell it for the price determined by the market.

Question It is summer and you decide to sell zucchini from your garden at a roadside stand. There are many other people also selling vegetables in the community. How will you decide what price to charge? Make a list of factors you would take into consideration in making this decision.

Answers a. How much did it cost you to grow the zucchini? b. Are you trying to make money? If the answer is yes, then you will want to set the price higher than your production costs. c. If the answer is no, because you just have a lot of zucchini and they will go to waste if you don’t sell them, then you can set the price lower. d. How much are other producers charging for their zucchini? In a competitive market where there are a lot of sellers, you are forced to keep your price equal or less than the competition. If you don’t then your sales will drop significantly.

Increase in Demand In this graph an increase in demand leads to a new, higher equilibrium price and quantity supplied. Remember that this graph, with its shift in the demand curve, represents an increase in demand at all price levels (e.g., in the event of a booming economy where all consumers have more money to spend).

In this graph a decrease in demand leads to a new, lower equilibrium price and quantity supplied. Decrease in Demand

Increase in Supply In this graph an increase in supply leads to a new, lower equilibrium price.

Decrease in Supply Finally, in this graph, a decrease in supply leads to a higher equilibrium price.

Elasticity of Supply and Demand The more inelastic a product in terms of supply and/or demand, the more dramatic the price change will be when there is a shift in supply or demand. This graph shows that there is a much greater change in price after a shift in supply when the demand curve is inelastic. If the demand curve is elastic then a shift insupplycauses a much smaller change in price.

In other words… In an elastic market changes will occur rapidly as the market adjusts quickly and completely. In a more inelastic market, changes will occur more gradually over time.

Government Intervention At times the government will intervene in a market to manipulate the price. This is commonly done through taxation (e.g., GST and PST on most products). It is also done through excise taxes on targeted products, usually with inelastic demand, with a more specific policy objective in mind. Taxes on gasoline help pay for road repairs. Taxes on alcohol and tobacco, sometimes called ‘sin taxes’, discourage what may be considered socially unacceptable behaviour. At other times the government will intervene to help either the producers or the consumers.

Government Intervention Example 1 The government has, at times, intervened in the agricultural sector of the economy to help producers. This may be because of a natural disaster such as a drought or tornado. One type of assistance the government can give is to guarantee the producer a minimum price for his or her product. This may mean holding prices above the equilibrium level in a competitive market..

Price Supports

What is the effect of price supports? If a price is artificially supported above the equilibrium price, then the quantity supplied will grow and be greater than the quantity demanded, which declined. The result is a surplus of the product. At times, the government has bought and stored surplus products such as wheat.

Example 2- Managing Inflation At other times the government has intervened in the market to keep prices low for the benefit of the consumer. During the 1970’s the federal government introduced wage and price controls to fight inflation. Prices on many products could not be increased by more than 5%. This resulted in some prices being held below the equilibrium price.

Keeping Prices Low

The Effect of Interfering If the price is kept artificially low then the quantity demanded will increase and the quantity supplied will decrease and the result will be a shortage of the product. When the government has imposed rent controls, the end result is often a shortage of rental properties as lower rents make it a less attractive endeavour.