ECON 2020 Lecture Notes - Lecture 5: Normal Good, Peanut Butter, Inferior Good
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27 Aug 2018
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4: the market forces of supply and demand. Markets and competition: market: group of buyers and sellers of a particular good or service. Competitive market: market in which there are many buyers and sellers: buyer has no effect on what market price is. Perfective competitive market: goods offered for sale are all exactly the same: no real life example, a lot of buyers and sellers and they have no impact on market price which are called price takers. Price takers must take or leave what the price is, both buyers and sellers: at the market price: buyers and sellers buy/sell all they want. Demand: quantity demanded: amount of good buyers are willing and able to purchase, law of demand: when prices increase, quantity demanded goes down. Price and quantity demanded are negatively related, which means consumers are less willing and able to purchase things: ceteris paribus is applied here!
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1. Characteristics of competitive markets
The model of competitive markets relies on these three core assumptions:
1. | There must be many buyers and sellers a few players can't dominate the market. |
2. | Firms must produce identical products buyers must regard all sellers' products as equivalent. |
3. | Firms and resources must be fully mobile, allowing free entry into and exit from the industry. |
The first two conditions imply that all consumers and firms are price takers. While the third is not necessary for price-taking behavior, assume for this problem that a market cannot maintain competition in the long run without free entry.
Identify whether or not each of the following scenarios describes a competitive market, along with the correct explanation of why or why not.
Scenario |
Competitive? |
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Several stores in the mall sell hooded sweatshirts. Each store's sweatshirts reflect the style of that particular store. Additionally, some makers use higher-quality cotton than others, which is reflected in the apparel's prices. | |
Two taxi companies serve most of the market in a big city. Consumers don't care about which taxi company they take if they decide it's worth taking a taxi, they flag down the nearest one. | _________________ |
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