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