Download Theory of Markets

AAEC 2305
Fundamentals of Ag Economics
Chapter 5 - Continued
Factors that Shift the
Demand Curve
 Population
• The more buyers, ceterus paribus, the greater
is demand.
 Tastes -
• Age, environment, and other geographic &
cultural factors can change tastes.
• New information about the health
characteristics of a product
• Advertising & changes in fashion
• Technological change
(continued)
 Income -
• Normal good - increase in income shifts
demand curve outward (& vice versa)
• Inferior good - increase in income shifts
demand curve inward (& vice versa)
(continued)
 Price of Related Goods -
• Substitutes - increase in the price of a
substitute, the demand curve for the related
good shifts outward (& vice versa)
• Complements - increase in the price of a
complement, the demand curve for the related
good shifts inward (& vice versa)
(continued)
 Expectations-
• Expectations about future prices, product
availability, and income can affect demand.
Factors that Shift the
Supply Curve
 Resource Prices-
• Increase in input prices results in an inward
shift of the supply curve
 Technology
• Technological improvements allow producers
to produce more of a good with the same
amount of inputs
(continued)
 Taxes & Subsidies-
• Taxes are treated as costs - increase in taxes
results in an inward shift of the supply curve.
• Subsidies - reduce costs and cause outward
shift in supply curve
 Prices of other Goods-
• Increase in the price of a another good would
result in an inward shift of the supply curve of
the related good
(continued)
 Expectations-
• Expectations about future prices can affect
supply today.
 Number of sellers-
• The supply curve shifts outward as new firms
enter an industry (& vice versa)
4 Types of Markets
 Pure Competition
 Monopolistic Competition
 Oligopoly
 Monopoly
 In this chapter, we are going to focus on
perfectly competitive markets.
Pure Competition
 Up to this point, we have assumed perfect
competition and will discuss perfect
competition in more detail in this chapter.
We begin with perfect competition
because it is basic to understanding of the
economic system and a benchmark against
which other market forms may be
compared.
Characteristics of
Pure Competition
 Many Buyers & Sellers
 Homogenous Product
 Freedom of Entry & Exit (i.e. there are no
barriers to entry)
 Perfect Information
Long-Run Costs of Production
 In the short-run, market price determines
the quantity of production as firms make
decisions on the basis of output price (MR)
and MC. In the long run the opposite
occurs.
 The long-run cost of production determines
the price of a product or service.