Markets and Market Structure

What is a Market?

A market is a group of economic agents who are trading a good or service, governed by (implicit or explicit) rules for trading. Markets can be physical (e.g., a town market) or virtual (e.g., online platforms like Amazon or Airbnb).

• Participants: Buyers (e.g., car owners needing fuel) and sellers (e.g., gas stations).

• Rules for trading: Sellers announce prices; buyers purchase if willing and able to pay.

• Examples: Markets exist for goods and services such as gasoline, haircuts, steel, cars, bars, tomatoes, and dating services.

• Location: Markets may have a physical location or operate online.

Perfectly Competitive Markets

Definition and Key Features

Economists often study perfectly competitive markets as a benchmark for understanding real-world markets.

• Identical Goods: All sellers offer an identical product or service.

• Price-Takers: No individual buyer or seller can influence the market price; all accept the prevailing market price.

• Single Market Price: Goods are traded at one price, known as the market price.

Examples and Non-Examples

• Commodities: Agricultural products and raw materials (e.g., steel, aluminum, soybeans, rice) often approach perfect competition.

• Non-Competitive Markets: Markets for differentiated goods (e.g., smartphones) are not perfectly competitive due to product differences, price-setting behavior, and price variation.

Why Study Perfect Competition?

• Few markets are perfectly competitive, but many are nearly perfectly competitive.

• Perfect competition serves as a useful benchmark for analyzing real markets.

• Choosing the right model requires knowledge and experience; not all markets fit the perfect competition model.

Building a Model: The Competitive Market

Assumptions and Principles

To analyze a competitive market, economists make simplifying assumptions:

• Identical goods are sold.

• All agents are price-takers.

• Buyers and sellers act to maximize their own benefit (rational behavior).

These assumptions allow the application of economic principles to predict market outcomes.

Demand

Individual Demand

The demand curve shows the relationship between the price of a good and the quantity demanded by an individual, holding all else constant (ceteris paribus).

• Law of Demand: As price decreases, quantity demanded increases (downward-sloping demand curve).

• Willingness to Pay (WTP): The maximum price a buyer is willing to pay for an additional unit of a good.

• Marginal Benefit: The additional benefit from consuming one more unit of a good, reflected in the WTP for that unit.

Example: If Camilla is willing to pay 20 NOK for the 200th liter of petrol, her marginal benefit for that unit is 20 NOK.

Market Demand

The market demand curve is the horizontal sum of all individual demand curves at each price level.

• For each price, add the quantities demanded by all buyers.

• The law of demand holds for the market as a whole.

Shifts vs. Movements Along the Demand Curve

• Movement along the curve: Caused by a change in the good's own price.

• Shift of the curve: Caused by changes in factors such as preferences, income, prices of related goods, number of buyers, or expectations about the future.

Supply

Individual Supply

The supply curve shows the relationship between the price of a good and the quantity supplied by a firm, holding all else constant.

• Law of Supply: As price increases, quantity supplied increases (upward-sloping supply curve).

• Marginal Cost (MC): The additional cost of producing one more unit of a good.

Example: If it costs ExxonMobil $100 to produce the 20th billionth barrel of oil, the marginal cost for that unit is $100.

Market Supply

The market supply curve is the horizontal sum of all individual supply curves at each price level.

• For each price, add the quantities supplied by all sellers.

Shifts vs. Movements Along the Supply Curve

• Movement along the curve: Caused by a change in the good's own price.

• Shift of the curve: Caused by changes in input prices, technology, number of sellers, or expectations about the future.

Market Equilibrium

Equilibrium Price and Quantity

Market equilibrium occurs where the demand and supply curves intersect. At this point, the quantity demanded equals the quantity supplied.

• Equilibrium Price (): The price at which the market clears.

• Equilibrium Quantity (): The quantity bought and sold at the equilibrium price.

Example: If the equilibrium price of oil is $100 per barrel and the equilibrium quantity is 35 billion barrels per year, the market is in balance.

Disequilibrium: Excess Supply and Excess Demand

• Excess Supply (Surplus): Occurs when price is above equilibrium; quantity supplied exceeds quantity demanded. This leads to downward pressure on price.

• Excess Demand (Shortage): Occurs when price is below equilibrium; quantity demanded exceeds quantity supplied. This leads to upward pressure on price.

Shifts in Demand and Supply

Changes in external factors can shift the demand or supply curve, leading to a new equilibrium.

• Leftward shift in supply: Decreases equilibrium quantity and increases equilibrium price.

• Leftward shift in demand: Decreases both equilibrium price and quantity.

• Simultaneous shifts: The effect on equilibrium price and quantity depends on the relative magnitude of the shifts.

Key Terms and Concepts (with Norwegian Translations)

• Fullkommen konkurranse: Perfect competition

• Prisfast kvantumstilpasser: Price-taking quantity adjuster

• Betalingsvilje: Willingness to pay

• Grensenytte (marginalnytte): Marginal utility

• Grensekostnad (marginalkostnad): Marginal cost

• Tilbudskurve: Supply curve

• Overskuddsetterspørsel: Excess demand

• Overskuddstilbud: Excess supply

Table: Example of Individual and Market Demand

The following table illustrates how individual demand curves are summed to obtain the market demand curve:

Key Equations

• Market Demand:

• Market Supply:

• Equilibrium Condition:

• Marginal Benefit:

• Marginal Cost:

Additional info: Some Norwegian terms were included for reference, and the table was reconstructed from the context of the notes.