Markets and Competition

Question 1

What is a market? (3)

Answer 1

• A place/site at which several vendors offer items for sale at
  specified prices.
• Regular/reliable - the market is open at same location and same
  times every week.
• The market is open to the public

Question 2

Demand

The amount someone would want to buy would depend on: (5)

How do you get total demand?

In the case of intermediate inputs, demand will likely be a ‘________
_________’

Demand for intermediate goods
will also depend on: (2)

Answer 2

Depend on:

• their preferences,
• income,
• prices,
• characteristics of the good, etc.

At a point in time, adding up the demand from all consumers will
give the total demand for a good/service

In the case of intermediate inputs, demand will likely be a ‘derived
demand’

Demand for intermediate goods
will also depend on price and the characteristics of the good.

Question 3

Is there a demand curve?

Answer 3

It is reasonable to suppose that for many goods, as price increases the quantity demanded would decrease, other things equal.

Question 4

Supply I

What do firms typically use to set their prices?

If the level of demand varies the firms could vary…?

What could supply then be thought of as?

What would happen if we change prices and that would also be the effect of what?

Answer 4

We have seen that firms typically use some form of ‘cost-plus’ pricing to set their prices

If the level of demand varies (at the set price) then firms could vary the level of production

Supply could then be thought of as the total available to buy in a particular market at a point in time

It might be costly for a firm to change prices, it might also be costly for a firm to quickly/frequently vary the level of
production.

Question 5

Supply II

What is a way to avoid frequent large changes in the level of production?

Answer 5

One way for a firm to avoid frequent large changes in the level of production is to run at an average level (recall the intended
utilization rate) and accumulate inventories during periods of low
demand, which can then be sold during periods of high demand.

Question 6

Is there a supply curve?

Answer 6

No.

If firms set prices then it is not meaningful to ask how a firm would respond to a change in price. If the price set is ‘right’ then firms would respond to additional demand by supplying more (if they are able to do so) at the prevailing price.

Question 7

Competition

Supposing that a market offers the opportunity to make profit, we might expect….? We might also expect each firm to…?

Answer 7

Supposing that a market offers the opportunity to make profit, we
might expect multiple entrepreneurs to wish to enter the market. We might also expect each firm to wish to secure for itself as much of the profit as possible.

Question 8

Why might a market have only one supplier, for a prolonged period? (5)

Answer 8

• unique ownership of a physical resource - more likely to apply in
  the case of a country rather than a company
• state regulation - monopolies originally awarded by royal
  prerogative (often sold), with - Statute of Monopolies in 1600s
  recognizing ‘new inventions’ as grounds for a patent/monopoly.
• state regulation - licensing of suppliers, e.g. regional water
  monopolies in England.
• extremely large start-up costs - how much would it cost to build
  a new water supply network (if allowed)?
• natural monopoly - in sectors with declining average costs, a
  new start-up will always be at a cost disadvantage relative to the
  established firm

Question 9

What is it called when a market features only a single customer and what is an example of this?

Answer 9

It is also possible for a market to feature only a single customer
(referred to as a case of monopsony), e.g. the market for battle tanks in the U.K.

In many markets the degree of competition lies somewhere between the extremes of monopoly or many small firms (only)

Question 10

Oligopolistic markets

What is an oligopoly?
Why might the distribution of market shares tend to such an outcome?

Answer 10

Many markets feature a few large firms and some small firms. The
case of a few large firms is referred to as oligopoly.

Why might the distribution of market shares tend to such an
outcome?

• Firms don’t all start at the same time - one or two might enter a
  market first, grow and then be joined later by smaller, new
  entrants.
• Competition is not a static process - there are winners.
• Once a firm is large it might have some ability to protect its
  position - greater marketing and R&D spending, or the ability to
  withstand losses for some time.