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Transcript of Topic 1 Markets
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Markets
Topic 1
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Topic 1 - Contents
1. Basic economic concepts
2. Market Definitions
3. Characteristics of a market
4. Basic market structures
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1. Definition of economics
"Economics is concerned with the
efficient use of LIMITED productive
resources for the purposes of attaining themaximum satisfaction of our (unlimited)
material wants." (Jackson, page 3)
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What is thebasic economic problem?
Providing for people’swants and needs in a
world of scarcity
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What is meant byscarcity ?
The condition in which wantsare forever greater than theavailable supply of time,
goods, and resources(Scarcity should not be confused with poverty )
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What does scarcityforce us to do?
It forces us tomake choices
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Basic Economic Questions
Limited resources Unlimited needs and wants
Scarcity
=> Choices must be made about:
• What to produce?
• How much to produce?
• For whom to produce?
• At what price to sell?
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Choice and Opportunity Cost
Choice involves sacrifice., i.e. choosingone thing means leaving the other things.
Rational choice – choices involve weighingup the benefit of an activity against itsopportunity cost.
Opportunity cost refers to the cost of an
activity measured in terms of the bestalternative forgone.
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What are economic
resources?The basic categories of
inputs used toproduce goods and
services
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What are the four
categories of resources?
Land Labor
Capital
Entrepreneurship
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What is aland resource? Any natural resource provided
by nature.Land includes anything natural above
and below the ground such as forests,
gold, diamond, oil, rivers, lakes, seas,air, the sun, the moon, etc.
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What is labor?
The mental and physical capacity
of workers to produce goods andservices
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What is capital?
The physical plants,
machinery, and equipmentused to produce other goods
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What is
financial capital?
The money used topurchase capital
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What is
entrepreneurship?
The creative ability of individuals to seek profits bycombining resources to
produce innovative products.
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LandLabor
Capital
Entrepreneurship organizesresources to produce goodsand services
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What economics is all about?
It is the study of how society chooses to
allocate its scarce resources to the
production of goods and services in order to satisfy unlimited needs and wants.
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Economic Efficiency
Economic
Efficiency
ProductiveEfficiency
AllocativeEfficiency
To produce at the
least possible cost
To produce the most
Desired products
Making stuff right Making the right stuff
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Economics – an overview
Macroeconomics deals with this problem at the
aggregate level. It focuses on the economy as a
whole – ie. the “big picture”
Microeconomics deals with the problem at the
level of individual units within the economy such
as consumers, firms etc.
“In microeconomics we examine the tree, not the
forest” (Jackson p.10)
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2. Markets
Broad Definition:
A mechanism or arrangement that brings
buyers and sellers of a good or service in
contact with one another (Jackson p.55)
Examples ??
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2. Markets Definition of a specific market:
A market includes all sellers who are in,or potentially in, competition with each
other; who sell closely substitutablegoods to a common group of buyers.
Two main elements of this definition:Demand substitutability
Supply substitutability
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2.1 Usefulness of Market Definition
Market definition helps firms to know who its
competitors are, what they are doing and for
whose business they are competing.
This will help management to make informed
decisions about:
Product pricing
Any new product lines
Advertising strategy
Investment
Etc.
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2.2 Elements of Demand substitutability
A market includes firms: 1) Selling products that are closely
substitutable in the consumers’ eyes -
The Produc t level 2) Selling products to a common group of
buyers in the same geographical area - The Geog raph ic d imens ion –
(international, national, state or local?)
3) Operating on the same Funct ional level – ie. manufacturing, wholesale or retail
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2.3 Elements of Supply substitutability
Definition of a market includes both:
Current suppliers (or sellers)
Firms currently selling products that are
considered to be close substitutes for eachother, and so part of the same market.
and Potential suppliers (or sellers)
Firms that have the ability to quickly andeasily move into supplying these products, if given the incentive.
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3. Characteristics of a market
Three key characteristics of a market
that influence firms’ behaviour :
Concentration
Product differentiation
Barriers to entry
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3. Characteristics of a market
3.1 Concentrat ion refers to the number and
size distribution of firms in a market, and
their market shares.
High concentration - a small number of
firms control a large market share
Low concentration – a large number of
firms and no firms have any market power
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3. Characteristics of a market
3.2 Product Dif ferent iat ion
Physical or subjective differences in
consumers’ minds between rival firms’
products. A feature of a product that sets it apart from
other similar products.
Examples of homogeneous (or standardised)
and differentiated products ??
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3. Characteristics of a market
3.3 Barr iers to entry – refers to how difficultit is for a new firm to enter a market andcompete with existing firms.
Types of barriers:
Legal (eg. gov’t regulations, patent rights..)
Technical Financial and economic (eg. economies of
scale)
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4. Basic Market structures
Characteristics Pure
Competition
Monopolistic
Competition
Oligopoly Monopoly
Concentration Large no. of
sellers
Many sellers/
(lowconcentration)
Few sellers/
(highconcentration)
One seller
Product
Differentiation
Homoge.
products
Differentiated
products
Homoge.
or
differentiated
Unique;
no close
substitute
Barriers to
Entry
Low barriers Some barriers High barriers High barriers
or
Blocked
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4.1 Basic Market structures
(Buyer’s side of market) 1. Pure competition: Many buyers; none
is able to influence prices
2. Monopolistic competition: Relativelylarge number of buyers.
3. Oligopsony: Few buyers, who are
independent and able to influence pricesand terms of exchange.
4. Monopsony: One buyer
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4.2 Problems with Classifying
structure In practice, it is often difficult to fit a market into
one category or another. It’s a matter of
judgment. No hard and fast rules. Different aspects of a market may fit into
different categories.
Market structures are changing over time
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