Microeconomics: Markets, Competition, and Monopolies
Microeconomics Concepts
Demand and Supply
25. Demand Function
The demand function is a mathematical relationship that describes the amount of a good demanded as influenced by its price, consumer income, and the prices of other goods. It can be represented as: Qa = d(Pa, Pb, g)
26. The Law of Supply and Supply Function
The Law of Supply: This law expresses the direct relationship between price and quantity supplied. As the price increases, the quantity supplied also increases.
The Supply Function: This function establishes that the amount of a good offered in a particular time period depends on its price, input prices, technology, and the number of companies operating in the market. It can be represented as: Qa = O(Pa, r, z, H)
The Law of Diminishing Returns: This law states that beyond a certain level, increasing the production of goods requires adding greater amounts of labor for each additional unit of output.
27. Surplus and Scarcity
Surplus: Occurs when there are sellers who, at the current market price, cannot sell all they desire.
Scarcity: Occurs when there are buyers who, at the current market price, cannot buy all they desire.
Types of Goods
29. Normal, Inferior, Luxury, and Necessity Goods
Normal Good: A good whose quantity demanded at each price increases when income increases.
Inferior Good: A good whose quantity demanded decreases with increasing income.
Luxury Good: A good where, when income increases, the quantity demanded increases to a greater proportion than the income increase.
Necessity Good: A good where, when income increases, the quantity demanded increases to a smaller proportion than the income increase.
30. Substitute and Complementary Goods
Substitute Goods: Goods where a price increase in one leads to an increase in the quantity demanded of the other.
Complementary Goods: Goods where a price increase in one leads to a decrease in the quantity demanded of the other.
Market Dynamics
31. Shifts in Supply and Demand Curves
Factors that Shift Supply:
- Prices of production factors
- Available technology
- Expectations about the future of the market
- Prices of other goods
Factors that Shift Demand:
- Changes in consumer income
- Changes in consumer tastes
- Changes in the prices of related goods
- Changes in consumer expectations
Movements along the Demand or Supply Curve: Occur when the price of the good changes.
33. Elasticity of Demand and Revenue
Elastic Demand: A price reduction increases total revenue, and a price increase reduces it.
Inelastic Demand: A price reduction decreases total revenue, and a price increase increases it.
34. Elasticity of Supply
Elasticity of supply measures the percentage change in the quantity supplied of a good when its price changes by 1%, holding other factors constant. It depends on the flexibility of sellers to alter the quantity produced.
Formula: Elasticity of Supply = (Percentage Change in Quantity Supplied) / (Percentage Change in Price)
Market Structures
35. Market Structures
a) Perfect Competition: No producer has control over the price, which is determined by the market. Common in agricultural products, raw materials, and goods traded in organized markets.
b) Monopolistic Competition: Many companies produce similar but differentiated goods. Companies have some control over price due to differentiation. Competition occurs through branding, advertising, and price changes.
c) Oligopoly: Few producers of similar goods. Producers have control over prices but must consider the reactions of rivals.
d) Monopoly: A single producer has power over the price. Often limited by government regulation or public opinion. Examples include utilities like gas, water, and public services.
Perfect Competition
36. Conditions of Perfect Competition
- Price-takers: Companies are unable to influence the price and sell at the market price.
- Large number of buyers and sellers: Individual decisions have little influence on the market.
- Product homogeneity: No difference between products from different suppliers.
- Perfect information: All participants have full knowledge of market conditions.
- Freedom of entry and exit: Companies can enter and exit the market freely.
37. Operation of a Competitive Business
Profits attract new suppliers, while losses lead to firms exiting the market. In the long run, economic profit in a competitive market tends towards zero.
Monopolies
38. Causes of Monopolies
- Control of a productive factor: A single company controls a key resource.
- Patents: Grant temporary monopolies.
- State monopolies: Government control of certain services.
- Natural monopolies: A single company can produce at a lower cost than multiple companies due to economies of scale.