Understanding Market Structures and Demand Influences
Factors Influencing Demand
Prices of Related Goods
The quantity demanded of a good depends on changes in the prices of related goods. These relationships can be categorized as substitutes or complements:
- Substitutes: If the price of one good increases, the demand for the other good increases. Examples include margarine and butter, tea and coffee, sugar and saccharin. Substitute goods satisfy the same consumer need.
- Complements: If the price of one good increases, the demand for the other good decreases. Examples include buses and fuel, coffee and milk.
Long-Term Business Strategies in Competitive Markets
In the long term, companies facing lower profits have two options:
- Restructure: Transform production processes to increase efficiency and profitability.
- Exit: Liquidate assets and move to a more profitable economic sector.
Monopoly
The term “monopoly” comes from the Greek words mono (one) and polein (to sell). Several types of monopolies exist:
Types of Monopoly
- Offer Monopoly: A single seller controls the market and determines the price, facing many buyers. Examples include utility companies like regional electricity providers.
- Demand Monopoly (Monopsony): A single buyer controls the market, with many suppliers who can only sell to that buyer. An example is a government’s defense industry purchasing exclusively from domestic suppliers.
- Bilateral Monopoly: A single buyer and a single seller interact. An example is wage negotiations between an employer and a labor union.
Causes of Monopoly
- Exclusive Control: A single company controls a commodity.
- Patents and Utility Models: These grant temporary monopolies. A patent gives an inventor exclusive rights to manufacture a product for a set period (20 years, non-renewable). A utility model protects a design improvement for a shorter period (10 years, non-renewable).
- State Control: Governments can create state monopolies by controlling the provision of certain services. While common in the past, EU legislation now restricts state monopolies.
- Natural Monopoly: Occurs when it’s more efficient for a single company to provide a good or service due to high fixed costs. Examples include utilities like water and electricity supply.
Normal and Inferior Goods
Goods can be classified based on how demand changes with income:
- Normal Good: Demand increases as income increases.
- Inferior Good: Demand decreases as income increases, as consumers switch to higher-quality alternatives. Examples include bologna, margarine, and bus transportation.
Types of Normal Goods
- Luxury Goods: Demand increases significantly as income rises (e.g., luxury cars).
- Necessity Goods: Demand increases less proportionally as income rises.
Factors Affecting Supply
The supply curve can shift due to factors other than the good’s price:
- Production Costs: A decrease in production costs increases supply, shifting the curve to the right.
- Technology: Technological improvements increase supply by enabling cheaper production.
- Market Expectations: Positive expectations about future economic conditions can increase supply.
Perfectly Competitive Market
A perfectly competitive market has the following characteristics:
- Numerous Buyers and Sellers: Many participants on both sides of the market.
- Product Homogeneity: No difference between products offered by different sellers.
- Market Transparency: All participants have full information about market conditions.
- Free Entry and Exit: Firms can easily enter or leave the market.
- Independent Agents: No collusion or agreements between buyers and sellers.