THE MARKET FORCES OF SUPPLY AND DEMAND
MARKETS AND COMPETITION
The terms supply and demand refer to the behavior of people as they
interact with one another in markets. A market is a group of buyers and sellers
of a particular good or service. The buyers as a group determine the demand for
the product, and the sellers as a group determine the supply of the product.
COMPETITIVE MARKETS; A competitive
market is a market in which there are many buyers and many sellers so that each
has a negligible impact on the market price. Each seller of has limited control
over the price because other sellers are offering similar products. A seller
has little reason to charge less than the going price, and if he or she charges
more, buyers will make their purchases elsewhere. Similarly, no single buyer
can influence the price because each buyer purchases only a small amount.
COMPETITION: PERFECT AND OTHERWISE
Perfectly competitive markets are defined by two primary
characteristics: (1) the goods being offered for sale are all the same, and (2)
the buyers and sellers are so numerous that no single buyer or seller can
influence the market price. Because buyers and sellers in perfectly competitive
markets must accept the price the market determines, they are said to be price
takers. There are some markets in which the assumption of perfect competition
applies perfectly.
Some markets have only one seller, and this seller sets the price. Such
a seller is called a monopoly. Your local cable television company, for
instance, may be a monopoly.
Some markets fall between the extremes of perfect competition and
monopoly. One such market, called an oligopoly, has a few sellers that do not
always compete aggressively. Airline routes are an example.
Another type of market is monopolistically competitive; it contains
many sellers, each offering a slightly different product. Because the products
are not exactly the same, each seller has some ability to set the price for its
own product. An example is the software industry.
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