![]() As a result, governments usually regulate such monopolies to ensure that they do not abuse their market power by setting prices too high. But consumers have no choice except to buy from the monopolist, and access may be unaffordable for some. It would be inefficient for two water companies to manage watersheds, negotiate usage rights, and lay pipes to households. ![]() For example, utilities are often monopolies. In monopoly situations, there usually is a barrier-natural or legal-to potential competitors. (Monopoly’s twin is monopsony, in which there is only one buyer, usually a government, although there may be many suppliers.) Barriers to competition ![]() The supplier does not take the market price as a given. In a monopoly, there is one supplier of a good for which there is no simple substitute. At the other end of the spectrum from perfect competition is monopoly. Of course, most markets are imperfect they are not composed of unlimited buyers and sellers of virtually identical items who have perfect knowledge. If the price of steak rises, consumers may quickly buy a cheaper cut of beef or switch to another meat. On the other hand, demand for many goods is very sensitive to price. It may be difficult or impossible in the short term for them to buy cars or houses that are more energy efficient. Consumers require energy to get to and from work and to heat their houses. A classic example of an inelastic good (at least in the short term) is energy. Goods that are inelastic are relatively insensitive to changes in price, whereas elastic goods are very responsive to price. The relationship between the supply and demand for a good (or service) and changes in price is called elasticity. Prices can change for many reasons (technology, consumer preference, weather conditions). The point at which the two curves intersect represents the market-clearing price-the price at which demand and supply are the same (see chart). Demand is generally considered to slope downward: at higher prices, consumers buy less. Supply is generally considered to slope upward: as the price rises, suppliers are willing to produce more. The equation that spells out the quantities consumers are willing to buy at each price is called the demand curve.ĭemand and supply curves can be charted on a graph, with prices on the vertical axis and quantities on the horizontal axis. Conversely, buyers tend to purchase more of a product the lower its price. The higher the price, the more suppliers are likely to produce. If prices fall, suppliers who are unable to cover their costs will drop out.Įconomists generally lump together the quantities suppliers are willing to produce at each price into an equation called the supply curve. Supply will increase until a market-clearing price is reached again. If prices rise, additional suppliers will be enticed to enter the market. Buyers will go on purchasing as long as the satisfaction they derive from consuming is greater than the price they pay (the marginal utility of consumption). ![]() Suppliers will keep producing as long as they can sell the good for a price that exceeds their cost of making one more (the marginal cost of production). Both sides take the market price as a given, and the market-clearing price is the one at which there is neither excess supply nor excess demand. In perfect competition, no one has the ability to affect prices. The most fundamental is perfect competition, in which there are large numbers of identical suppliers and demanders of the same product, buyers and sellers can find one another at no cost, and no barriers prevent new suppliers from entering the market. Perfect competitionĮconomists have formulated models to explain various types of markets. At the other extreme, there might be only one seller and one buyer (as would be the case if I want to barter my table for your quilt). At one extreme, the market could be populated by a large number of virtually identical sellers and buyers (for example, the market for ballpoint pens). Supply and demand are in turn determined by technology and the conditions under which people operate. When buyers and sellers get together, the key outcome is a priceįor economists, a market is determined by how supply and demand come together to determine a price. The Big Picture Supply and Demand: Why Markets Tick Back to Basics Compilation | Finance & Development | PDF version I.
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