Markets and Competition
The terms supply and demand refer to the behavior of people as they interact with
one another in competitive markets. Before discussing how buyers and sellers
behave, let’s first consider more fully what we mean by the terms market and
competition.
4-1a What Is a Market?
A market is a group of buyers and sellers of a particular good or service. The buy-
ers as a group determine the demand for the product, and the sellers as a group
determine the supply of the product.
Markets take many forms. Some markets are highly organized, such as the mar-
kets for many agricultural commodities. In these markets, buyers and sellers meet
at a specific time and place where an auctioneer helps set prices and arrange sales.
More often, markets are less organized. For example, consider the market for
ice cream in a particular town. Buyers of ice cream do not meet together at any one
time. The sellers of ice cream are in different locations and offer somewhat
different
products. There is no auctioneer calling out the price of ice cream. Each seller
posts
a price for an ice-cream cone, and each buyer decides how much ice cream to buy
at each store. Nonetheless, these consumers and producers of ice cream are closely
, connected. The ice-cream buyers are choosing from the various ice-cream sellers
to
satisfy their cravings, and the ice-cream sellers are all trying to appeal to the same
ice-cream buyers to make their businesses successful. Even though it is not as
orga-
nized, the group of ice-cream buyers and ice-cream sellers forms a market.
4-1b What Is Competition?
The market for ice cream, like most markets in the economy, is highly competi-
tive. Each buyer knows that there are several sellers from which to choose, and
each seller is aware that his product is similar to that offered by other sellers. As a
result, the price and quantity of ice cream sold are not determined by any single
buyer or seller. Rather, price and quantity are determined by all buyers and sellers
as they interact in the marketplace.
Economists use the term competitive market to describe a market in which
there are so many buyers and so many sellers that each has a negligible impact
on the market price. Each seller of ice cream 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 charges more, buyers will make their
purchases elsewhere. Similarly, no single buyer of ice cream can influence the
price of ice cream because each buyer purchases only a small amount.
In this chapter, we assume that markets are perfectly competitive. To reach this
highest form of competition, a market must have two characteristics: (1) The
The terms supply and demand refer to the behavior of people as they interact with
one another in competitive markets. Before discussing how buyers and sellers
behave, let’s first consider more fully what we mean by the terms market and
competition.
4-1a What Is a Market?
A market is a group of buyers and sellers of a particular good or service. The buy-
ers as a group determine the demand for the product, and the sellers as a group
determine the supply of the product.
Markets take many forms. Some markets are highly organized, such as the mar-
kets for many agricultural commodities. In these markets, buyers and sellers meet
at a specific time and place where an auctioneer helps set prices and arrange sales.
More often, markets are less organized. For example, consider the market for
ice cream in a particular town. Buyers of ice cream do not meet together at any one
time. The sellers of ice cream are in different locations and offer somewhat
different
products. There is no auctioneer calling out the price of ice cream. Each seller
posts
a price for an ice-cream cone, and each buyer decides how much ice cream to buy
at each store. Nonetheless, these consumers and producers of ice cream are closely
, connected. The ice-cream buyers are choosing from the various ice-cream sellers
to
satisfy their cravings, and the ice-cream sellers are all trying to appeal to the same
ice-cream buyers to make their businesses successful. Even though it is not as
orga-
nized, the group of ice-cream buyers and ice-cream sellers forms a market.
4-1b What Is Competition?
The market for ice cream, like most markets in the economy, is highly competi-
tive. Each buyer knows that there are several sellers from which to choose, and
each seller is aware that his product is similar to that offered by other sellers. As a
result, the price and quantity of ice cream sold are not determined by any single
buyer or seller. Rather, price and quantity are determined by all buyers and sellers
as they interact in the marketplace.
Economists use the term competitive market to describe a market in which
there are so many buyers and so many sellers that each has a negligible impact
on the market price. Each seller of ice cream 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 charges more, buyers will make their
purchases elsewhere. Similarly, no single buyer of ice cream can influence the
price of ice cream because each buyer purchases only a small amount.
In this chapter, we assume that markets are perfectly competitive. To reach this
highest form of competition, a market must have two characteristics: (1) The
