Demand & SupplyMonopolies, Oligopolies & Perfect

Competition

Market failure

The relationship between demand and supply underlie the forces behind the allocation of resources. In market economy theories, demand and supply theory will allocate resources in the most efficient way possible.

How? Let us take a closer look at the law of demand and the law of supply.

Introduction

The Law of Demand The law of demand states that, if all other factors remain equal, the higher the price of a good, the less people will demand that good. In other words, the higher the price, the lower the quantity demanded.

Review

The Law of Supply Like the law of demand, the law of supply demonstrates the quantities that will be sold at a certain price. But unlike the law of demand, the supply relationship shows an upward slope. This means that the higher the price, the higher the quantity supplied.

Review

• Equilibrium When supply and demand are equal (i.e. when the supply function and demand function intersect) the economy is said to be at equilibrium. At this point, the allocation of goods is at its most efficient because the amount of goods being supplied is exactly the same as the amount of goods being demanded. Thus, everyone (individuals, firms, or countries) is satisfied with the current economic condition. At the given price, suppliers are selling all the goods that they have produced and consumers are getting all the goods that they are demanding. 

Review

As you can see on the chart, equilibrium occurs at the intersection of the demand and supply curve, which indicates no allocative inefficiency.

In the real market place equilibrium can only ever be reached in theory, so the prices of goods and services are constantly changing in relation to fluctuations in demand and supply. 

Review

Disequilibrium Excess Supply  

If the price is set too high, excess supply will be created within the economy and there will be allocative inefficiency. 

Review

Disequilibrium Excess Demand  

Excess demand is created when price is set below the equilibrium price. Because the price is so low, too many consumers want the good while producers are not making enough of it.

Review

• In some industries, there are no substitutes and there is no competition.

• In a market that has only one or few suppliers of a good or service, the producer(s) can control price, meaning that a consumer does not have choice, cannot maximize his or her total utility and has have very little influence over the price of goods. 

Review

• Monopoly A situation in which a single company or group owns all or nearly all of the market for a given type of product or service. By definition, monopoly is characterized by an absence of competition, which often results in high prices and inferior products.

• Oligopoly A situation in which a particular market is controlled by a small group of firms. In an oligopoly, there are at least two firms controlling the market.

Review

• There are two extreme forms of market structure: monopoly and, its opposite, perfect competition.

• Perfect competition is characterized by many buyers and sellers, many products that are similar in nature and, as a result, many substitutes. Perfect competition means there are few, if any, barriers to entry for new companies, and prices are determined by supply and demand.

Review

Discussion

What is market failure?

Market failure occurs when freely-functioning markets, fail to deliver an efficient allocation of resources. The result is a loss of economic and social welfare. Market failure exists when the competitive outcome of markets is not efficient from the point of view of society as a whole. This is usually because the benefits that the free-market confers on individuals or businesses diverge from the benefits to society as a whole.

Discussion

What is market failure?

Discussion

Markets can fail because of what?

Discussion

Markets can fail because of what?

Discussion

Markets can fail because of what?

Discussion

Markets can fail because of what?

Positive (or beneficial) externalities (e.g. the provision of education and health care) causing the social benefit of consumption to exceed the private benefit.

Discussion

Markets can fail because of what?

Discussion

Markets can fail because of what?

Discussion

Markets can fail because of what?

Negative externalities (e.g. the effects of environmental pollution and climate change) causing the social cost of production to exceed the private cost.

Discussion

Markets can fail because of what?

Discussion

Markets can fail because of what?

Equity (fairness) issues. Markets can generate an ‘unacceptable’ distribution of income and consequent social exclusion which the government may choose to change

Discussion

Markets can fail because of what?

Discussion

Markets can fail because of what?

Discussion

Markets can fail because of what?

Imperfect information means merit goods are under-produced while demerit goods are over-produced or over-consumed.The private sector in a free-markets cannot profitably supply to consumers pure public goods and quasi-public goods that are needed to meet people’s needs and wants.

Discussion

Markets can fail because of what?

Also:Market dominance by monopolies can

lead to under-production and higher prices than would exist under conditions of competition.

Factor immobility causes unemployment hence productive inefficiency.

Discussion

Market failure results in:

Discussion

Market failure results in:

Productive inefficiency: Businesses are not maximising output from given factor inputs. This is a problem because the lost output from inefficient production could have been used to satisfy more wants and needs.

Allocative inefficiency: Resources are misallocated and producing goods and services not wanted by consumers. This is a problem because resources can be put to a better use making products that consumers value more highly.

End

Thank you!