Limba engleză

UNIT ONE

CONCEPTS IN ECONOMICS

OBJECTIVES: After studying this chapter, you should be able to:

o understand the concepts of supply and demand and competition

o comprehend how supply and demand determine price in competitive markets

o know what a small business is and name the fields in which small business are concentrated

o describe the people who start small businesses, how some succeed, and why many fail

o understand the contribution of small businesses to economy

MODULE I

LEAD-IN

1. What forms of competition do you know?

2. What determines the price of a product?

3. Give a definition of the demand for a particular product.

4. Define the supply of a particular product.

SUPPLY, DEMAND, PRICE AND COMPETITION

A free-market system implies competition among sellers of products and resources. Economists

recognize four different degrees of competition, ranging from ideal competition to no competition at all.

These are pure competition, monopolistic competition, oligopoly and monopoly.

Pure (or perfect) competition is the market situation in which there are many buyers and sellers of a

product, and no single buyer or seller is powerful enough to affect the price of that product. Note that this

definition includes several important ideas. First, we are discussing the market for a single product. Second,

all sellers offer essentially the same product for sale; a buyer would be just as satisfied with seller A's wheat

and with that offered by seller B or seller Z. Third, all buyers and sellers know everything there is to know

about the market (including the prices that all sellers are asking for their wheat). And fourth, the market is

not affected by the actions of any one buyer or seller. In pure competition, sellers and buyers must accept the

going price. But who determines the price? Actually, everyone does. The price of each product is determined

by the actions of all buyers and sellers together, through the forces of supply and demand. It is this interaction

of buyers and sellers, working for their best interest, that Adam Smith referred to as the "invisible hand" of

competition. Let us see how it operates.

The supply of a particular product is the quantity of the product that producers are willing to sell at

each of various prices. Supply is thus a relationship between prices and the quantity offered by producers.

12 Business Issues

We expect the sellers to offer more of a product for sale at higher prices and to offer less of a product at lower

prices.

The demand for a particular product is the quantity that buyers are willing to purchase at each of

various prices. Demand is thus a relationship between prices and the quantities purchased by buyers. Buyers,

too, are usually rational, so we would expect them – as a group – to buy more of a product when its price is

low and to buy less of the product when its price is high. This is exactly what happens when the price of

fresh strawberries rises dramatically. People buy other fruit or do without and reduce their purchase of

strawberries. They begin to buy more fresh strawberries only when the prices drop.

Under pure competition, the market price of any product is the price at which the quantity demanded

is exactly equal to the quantity supplied.

In theory and in the real market, prices are affected by anything that affects supply and demand. The

demand for wheat, for example, might change if researchers discovered that it had very beneficial effects on

users’ health. Then more wheat would be demanded at every price. The supply of wheat might change if

new technology permitted the production of greater quantities of wheat from the same surface. In that case,

producers would be willing to supply more wheat at each price. Either of these changes would result in a

new market price. Other changes that can affect competitive prices are shifts in buyer tastes, the development

of new products that satisfy old needs and fluctuations in income due to inflation or recession.

Pure competition is only a theoretical concept. Some specific markets (such as auctions of farm products)

may come close, but no real market totally exhibits perfect competition. Many real market, however, are

examples of monopolistic competition. Monopolistic competition is a market situation in which there are

many buyers along with relatively many sellers who differentiate their product from the products of

competitors, by providing unique product features – an attention-getting brand name, unique packing or

services such as free delivery or a “lifetime” warranty. Product differentiation is a fact of life for the producers

of many consumer goods, from soaps to clothing, or to personal computers. By differentiating its product

from all similar products, the producer obtains some limited control over the market price of its product.

An oligopoly is a market situation (or industry) in which there are few sellers. Generally, these sellers

are quite large, and sizable investments are required to enter into their market. Examples of oligopolistic

industries are the American automobile, industrial chemicals and oil refining industries.

Because there are few sellers in an oligopoly, each seller has considerable control over price. At the same

time, the market actions of each seller can have a strong effect on competitors’ sales. If one firm reduces its

price, the other firms in the industry usually do the same to retain their market shares. This usually results in

similar prices for similar products. In the absence of much price competition, product differentiation becomes

the major competitive weapon.

A monopoly is a market (or industry) with only one seller. Because only one firm is the supplier of a

product, it has complete control over price. However, no firm can set its price at some astronomical figure

just because there is no competition; the firm would soon find that it had no sales revenue. Instead, a firm in

a monopoly position must consider the demand for its utilities, such as we find in the electric power distribution.

They are permitted to exist because the public interest is best served by their existence, but they operate

under the scrutiny and control of various state and federal agencies.