Lecture 4

Economic forces
and Market
structure
 Contents

I. Economic forces

II. Market structure

I. Economic forces
 The Market

• The market is a place where buyers and sellers of a

product are brought together.
• In the product market, the buyer is the household and the
seller is the firm.
• In economic language the household demands the good
or service and the firm supplies the good or service.
 Economic scarcity

Limited resources Scarcity of goods and Unlimited

services wants

Choices have to be made

What to use the How to best use How to best distribute the
resource for? the resources? goods and services?
 Demand

• The quantity demanded refers to the quantity of a good or

service that households are willing and able to purchase at a
particular price.
• The demand for a good or service depends on a number of
factors, the most important of which are:
• The price of the good
• The prices of other goods
• Disposable income
• Tastes
• The number of buyers
 Demand curve

The demand curve for draught beer

1.6

1.5

1.4

1.3
The demand

Price (£)
1.2 curve
1.1

0.9

0.8
20 30 40 50 60 70 80 90
Quantity demanded (000s pint/week)
 Demand curve

• The law of demand: if all factors

which influence demand are
constant then as price goes up,
quantity demanded goes down
• However, this may not be always
true. For example: the stock market,
crypto currency in 2017, real estate,
etc …
• Changes in prices are shown by a
movement along the demand
curve
Movement of the demand
curve
 Price of other goods

• A substitute is a product that can offer the same benefits

as the goods being consumed.
• The price of a substitute has a negative correlation with
the price of the current good
• A complementary good is one which tends to be
consumed with another good
• The price of a complementary goods has a positive
correlation with the price of the demanded goods.
 Disposable Income

• Disposable income is income remaining after deduction

of taxes and other mandatory charges, available to be
spent or saved as one wishes.
• Higher disposable income will lead to increased
consumption of most goods
• Normal goods are goods that are consumed less as
incomes fall
• Inferior goods are goods that experience a fall in
demand as income raise
 Tastes

• Taste includes attitudes and preferences of consumers,

and will be affected by such things as fashion, and
advertising campaigns by producers or by governments
• For example:
• China’s campaign for potato consumption
• Vietnamese Government’s push for using renewable
energy
• The “Supreme” phenomenon
 Supply

• The quantity supplied of a good is defined as the quantity that firms

are willing and able to supply to the market at a particular price.
• The quantity supplied to the market depends on a number of factors,
the most important of which are
• The price of the good
• The prices of other goods;
• The prices of the resources used to produce the good
• Technology
• Expectations
• Number of suppliers.
 Supply curve

The supply curve for draught beer

1.6

1.5

1.4

1.3

Price (£)
1.2

1.1
The supply curve
1

0.9

0.8
Why doesn’t the 20 30 40 50 60
Quantity demanded (000s pint/week)
70 80

supply curve start

at 0?
 Supply curve

The supply curve for draught beer • The law of supplies: as the
1.6
prices of one good rises, the
1.5
quantity that firm are willing to
1.4 supplies will rise
1.3
• This is because if costs are
Price (£)

1.2 constant as we have assumed,

1.1 then higher prices must mean
1
higher profits to the firm.
0.9 • Changes in prices are shown by
0.8
a movement along the
20 30 40 50 60
Quantity demanded (000s pint/week)
70 80
demand curve
Movement of the supply
curve
 Other prices

• The supply of one good can be influenced by the price of

another
• If the substitute goods increase in price, more firms will
supply that good to the market  an increase in supply.
(supply curve shift to the right)
• Goods can also be complements in their production process
– For example, beef and leather hides. An increase in the price of beef
would increase not only the supply of beef but also the supply of
hides
 Prices of the resources
used in the production of
• Assuming the price stays constant: the good

Production
Lower Supply
cost
profitability decrease
increase

Production
Higher Supply
cost
profitability increase
decrease
 Technology

• Technical development in all aspects of production has

led to great improvements in output per workers which
generally result in either more being produced with the
same resources, or the same being produced with fewer
resources
 Business expectations

• Good expectations of the future would encourage firms to

invest in new plant and machinery, which would increase
their productive potential. The reverse would shift it to the
left.
• For example: The mortgage supply in 2008 crisis, the
housing bubble in Vietnam, etc…
 The number of suppliers

• As the number of suppliers in a market increases the

supply will rise; the supply curve shifts to the right
• If suppliers leave the market, supply will fall and the
supply curve moves to the left
• For example: Vietnamese agriculture products; due to
poor planning, which results in lower market price of
pepper; more and more Vietnamese farmers stop
growing them.
 The equilibrium price

• Equilibrium price is the price at which the amount that

consumers wish to buy is the same as the amount that
producers wish to sell
• The quantity being bought and sold is called the
equilibrium quantity.
 The equilibrium price

Market for Beer

1.60

1.50
Excess supply
1.40

Price (£ per pint)

1.30
Equilibrium
1.20

1.10

1.00
Excess demand
0.90

0.80
20 30 40 50 60 70 80 90
Quantity

Supply curve Demand curve

Shifts in demand and supply
 Price elasticity in demand

• Elasticity of demand is a measure of the change in the

quantity demanded or purchased of a product in relation
to its price change.
• The formula being:
% change in Quantity Demanded
• Price elasticity of demand =
% change in price
Price elasticity of demand
>1 Elastic (responsive to price change)
<1 Inelastic (not responsive to price change)
 Determinants of elasticity

• Necessity
• Taste
• Substitute
• Household budget
 Discussion

• 1. Show the effects on the market for houses of the

following:
• (a) a fall in income levels;
• (b) a rise in the rate of interest;
• (c) the lack of a ‘feel good factor’ in the economy
 Discussion

• 2. Considering the market for automobile, show the

effects of the following changes using demand and supply
diagrams:
• (a) an increase in the number of people owning
automobile;
• (b) a fall in the cost of producing automobile; and
• (c) a movement away from personal transportation and
toward public transportation
 Discussion

• 3. Have the changes you predicted in your answers to

questions 1 and 2 actually happened in the real world? If
not, why not?
II. Market structure
 Market Structures

• Market structure’ refers to the amount of competition that

exists in a market between producers
• There are 4 main types
1. Perfect competition
2. Monopolistic Competition Level of
competition
3. Oligopoly
4. Monopoly
 Perfect competition

• A perfect competitive market must have the following

characteristics:
• Many buyers and sellers
• The good being sold is homogeneous (identical)
• Perfect knowledge
• Perfect mobility
• No barriers to entry or exit
 Perfect competition

IMPLICATIONS OF PERFECT COMPETITION

Extent of market power

The firms have no market power at all

Price There will only be one price of good  firm = price taker

There will be no advertising since everyone has the same

Advertising
knowledge

There can be no abnormal profits, except possibly in the very short

Profitability run if a producer reduces price and captures a larger share of the
market.
 Example of Perfect
Competition
• Grocery markets
• Stock market
• Horse betting
• Free software
 Monopolistic Competition

• Market structure of monopolistic competition exists when

all of the conditions for perfect competition are met
except for the existence of a homogeneous good

• Each firm has a monopoly over its own good but there is a
great deal of competition in the market from other
suppliers producing very similar products
 Monopolistic

IMPLICATIONS OF MONOPOLISTIC

Extent of market power The firms have no market power at all

Price There will be small differences in price.

Advertising There will be heavy advertising and branding.

Small abnormal profits can exist in the short run but will be
Profitability
competed away in the longer run.
 Example

• Paint industry
• Restaurant & Hotels
• Consumer services such as tattoo shop etc..
• Furniture store
 Oligopoly

• Oligopoly is where a small number of producers supply a

market in which the product is differentiated in some way.
• Here are some characteristics of oligopoly:
• A great deal of interdependence between the firms
• A lack of price competition in the market
• Different forms of non-price competition take place, such
as branding or advertising
• Price is determined by either price leadership or collusion
 Oligopoly

IMPLICATIONS OF OLIGOPOLY

Extent of market power (Firm’s) A great deal of market power.

Price A stable price level. Prices set by price leadership or collusion

Advertising Much advertising and branding. Non-price competition is common

Abnormal profits can exist, their extent depends on the strength of

Profitability
competitors.
 Example

• Vietnamese example
• United States’ telecommunication market
• Chinese automobile market
 Monopoly

• In its purest form a monopolistic market is one in which there

is no competition at all; there is a single producer supplying
the whole market.
• Power depends on the availability of substitute and barriers
to entry
• Firm can charge different price for the same good
• A monopolist could also be a group of producers acting
together to control supply to the market: for example, a
cartel such as OPEC
• Price discrimination: different demand + same good =
different price
 Monopoly

IMPLICATIONS OF MONOPOLY

Extent of market power

The firm has absolute market power

There will only be one price for the good, except in the case of
Price
price discrimination  The firm = “price maker”

Advertising No advertising because there is only one firm producing the good

Abnormal profits can exist in the long run as there is no

Profitability
competition which might erode them away.
 Example of Monopoly

• Diamond
• Software
• Search engine
• Utility service
• Eyewear – US market
 Summarize

Perfect Monopolistic
Oligopoly Monopoly
competition competition

Market power None Little High Absolute

Price
Small differences
Price One price One price discrimination
in price
possible

Advertising None High High None

Only normal profit

Profitability Only normal profit Abnormal profit Abnormal profit
in long run
THE END