Understanding Demand and Market Structures
Shifting the Demand Curve
Price fluctuations, while other production factors remain constant, cause shifts in the demand curve. These shifts occur due to changes in:
- Price
- Consumer tastes
- Income
- Purchasing power
- Demand for related goods
The demand curve shifts to the right when income increases (for normal goods). However, the demand for inferior goods decreases as income rises.
Types of Goods
- Inferior Good: Quantity demanded decreases as income rises.
- Normal Good: Quantity demanded increases as income rises. A normal good typically has substitutes.
- Necessity: As income rises, demand increases, but at a slower rate.
- Luxury Good: As income rises, demand increases at a faster rate.
- Substitute Good: A price increase for one good leads to increased demand for its substitute.
- Complementary Good: A price increase for one good leads to decreased demand for its complement.
Changes in consumer tastes and preferences, often influenced by advertising or trends, can also shift the demand curve.
Shifting the Supply Curve
Lower prices lead to lower supply, while higher prices lead to higher supply. Factors influencing supply include:
- Prices of production factors (land, labor, capital)
- Available technology
- Weather conditions (especially in agriculture)
Movement along the demand curve results from changes in the product’s price.
Demand Elasticity
- Elastic Demand: The percentage change in quantity demanded is greater than the percentage change in price.
- Inelastic Demand: The percentage change in quantity demanded is less than the percentage change in price.
- Perfectly Inelastic Demand: Quantity demanded doesn’t change when the price changes (elasticity is zero).
- Perfectly Elastic Demand: Buyers are only willing to pay a specific price, regardless of quantity (elasticity is infinite).
Market Competition
Market competition determines equilibrium prices and quantities.
- Imperfect Competition: One or more suppliers are large enough to influence the price.
- Perfect Competition: Many buyers and sellers, with uniform products.
- Monopoly: A single seller controls the market and sets prices. Causes of monopolies include control over a production factor, patents, and government grants.
Combating Monopolies
- Dividing the monopoly
- Preventing monopoly formation
- Regulating existing monopolies through price controls and taxes
Oligopoly
Oligopoly: A small group of suppliers influences the market and prices. A cartel is a group of companies that collude to control prices and eliminate competition.