Supply, Demand, Price and Competition

Learning objectives:

Comprehend how supply and demand determine the price

Characterize the four forms of competition

Analyze the possible advantages and disadvantages of competition both for the customers and for the sellers

Study and Learn the Words:

English English equivalents Romanian Russian
to affect to influence    
bushel a unit for measuring grain, fruit    
shift (n) change    
inflation (n) a general rise in the prices of goods and services    
generic product not using the name of the company that made it    
brand name the name given to a product by the company that produces it    
Bayer the name of a famous pharmaceutical company    
warranty (n) guarantee    
recession (n)   recesiune, criză экономический спад
to follow suit to follow an example    
wariness (n)   precauţiune, prudenţă осмотрительность, осторожность
scrutiny (n)   cercetare, verificare meticuloasă внимательный осмотр; наблюдение, исследование
loan (n)   împrumut, credit заём, ссуда

WORD STUDY

To rise, to raise, to arise

The verb to rise (rose, risen) is used without object. It means to move from a lower to a higher position:

E.g. She rose from the chair.

Gas rose in price.

Unemployment is rising.

The verb to raise must have an object and it means to lift sth to a higher position or to increase it:

E.g. She raised her eyes from her work.

Government has raised taxes.

to raise money = to collect money

The verb to arise (arose, arisen) means to happen, to occur, to start to exist.

E.g. A new crisis has arisen.

Now complete the following sentences with the 3 studied verbs. Use them in the appropriate tenses.

1. Our supplier ___________ the price of electric equipment.

2. If any misunderstandings ___________ I’ll let you know.

3. The prices of raw materials ________________ recently.

4. The management of the company decided _______________ the salaries.

5. It will be necessary ____________ money if we want to extend the business.

6. We keep them informed of any changes as they ______________ .

7. This book _____________ many important questions.

8. Several new industries _____________ in the town.

9. Those who agree are asked ___________ a hand.

10. Profits _____________ last year by 25%.

The supplyof a particular product is the quantity of the product that producers are willing to sell at each of various prices. Supply is thus a relationship between prices and the quantities offered by producers, who are usually rational people, so we would expect them to offer more of a product for sale at higher prices and to offer less of the product at lower prices.

The demandfor a particular product is the quantity that buyers are willing to purchase at each of various prices. Demand is thus a relationship between prices and the quantities purchased by buyers, who are rational people too, so we would expect them to buy more of a product when its price is low and to buy less of the product when its price is high. This is exactly what happens when the price of fresh strawberries rises dramatically. People buy other fruit or do without and reduce their purchases of strawberries. They begin to buy more strawberries only when prices drop.

Forms of Competition

A free-market system implies competition among sellers of products and resources. Economists recognize four different degrees of competition, ranging from ideal competition to no competition at all. These are pure competition, monopolistic competition, oligopoly, and monopoly.

Pure (or perfect) competition is the complete form of competition. It is the market situation in which there are many buyers and sellers of a product, and no single buyer or seller is powerful enough to affect the price of that product.The above definition includes several important ideas:

- there is a demand for a single product;

- all sellers offer the same product for sale;

- all buyers and sellers know everything there is to know about the market;

- the market is not affected by the actions of any one buyer or seller.

In pure competition the sellers and buyers must accept the going price. But who or what determines the price? Actually, everyone does. The price of each product is determined by the actions of all buyers and all sellers together, through the forces of supply and demand. It is this interaction of buyers and sellers, working for their best interest that Adam Smith referred to as the “invisible hand” of competition.

Neither sellers nor buyers exist in a vacuum. What they do is interact within a market.And there is always one certain price at which the quantity of a product that is demanded is exactly equal to the quantity of that product that is produced. Suppose producers are willing to supply 2 million bushels of wheat at a price of $5 per bushel and that buyers are willing to purchase 2 million bushels at a price of $5 per bushel. In other words, supply and demand are in balance, or in equilibrium, at the price of $5. This is the "going price" at which producers should sell their 2 million bushels of wheat. Economists call this price the equilibrium price or market price. Under pure competition, the market priceof any product is the price at which the quantity demanded is exactly equal to the quantity supplied.

In theory and in the real world, market prices are affected by anything that affects supply and demand. The demand for wheat, for example, might change if researchers suddenly discovered that it had very beneficial effects on users' health. Then more wheat would be demanded at every price. The supply of wheat might change if new technology permitted the production of greater quantities of wheat from the same amount of acreage. In that case, producers would be willing to supply more wheat at each price. Either of these changes would result in a new market price. Other changes that can affect competitive prices are shifts in buyer tastes, the development of new products that satisfy old needs, and fluctuations in income due to inflation or recession. For example, generic or "no-name" products are now available in supermarkets. Consumers can satisfy their needs for products ranging from food to drugs to paper products at a lower cost, with quality comparable to brand name items. Bayer was recently forced to lower the price of its very popular aspirin because of competition from generic products.

Pure competition is only a theoretical concept. Some specific markets may come close, but no real market totally exhibits perfect competition. Many real markets, however, are examples of monopolistic competition. Monopolistic competitionis a market situation in which there are many buyers along with relatively many sellers who differentiate their products from the products of competitors and it is very easy to enter into this market. The various products available in a monopolistically competitive market are very similar in nature, and they are all intended to satisfy the same need. However, each seller attempts to make its product somewhat different from the others by providing unique product features — an attention-getting brand name, unique packaging, or services such as free delivery or a "lifetime" warranty.

Product differentiation is a fact of life for the producers of many consumer goods, from soaps to clothing to personal computers. Actually, monopolistic competition is char­acterized by fewer sellers than pure competition, but there are enough sellers to ensure a highly competitive market. By differentiating its product from all similar products, the producer obtains some limited control over the market price of its product.

An oligopolyis a market situation (or industry) in which there are few sellers (2-8). Generally these sellers are quite large, and sizable investments are required to enter into their market. For this reason, oligopolistic industries tend to remain oligopolistic. Examples of oligopolies are the American automobile, industrial chemicals, and oil refining industries.

Because there are few sellers in an oligopoly, each seller has consid­erable control over price. At the same time, the market actions of each seller can have a strong effect on competitors' sales. If one firm reduces its price, the other firms in the industry usually do the same to retain their market shares. If one firm raises its price, the others may wait and watch the market for a while, to see whether their lower price tag gives them a competitive advantage, and then eventually follow suit.All this wariness usually results in similar prices for similar products. In the absence of much price competition, product differentiation becomes the major competitive weapon.

A monopolyis a market (or industry) with only one seller. Because only one firm is the supplier of a product, it has complete control over price. However, no firm can set its price at some astronomical figure just because there is no competition; the firm would soon find that it had no sales revenue, either. Instead, the firm in a monopoly position must consider the demand for its product and set the price at the most profitable level.

The few monopolies in American business don't have even that much leeway in setting prices because they are all carefully regulated by government.

Most monopolies in America are public utilities, such as we find in electric powerdistribution. They are permitted to exist because the public interest is best served by their existence, but they operate under the scrutiny and control of various state and federal agencies.

I. VOCABULARY PRACTICE

A) Match the words with their definitions:

1. to range from A to B a) the act of taking goods to the people who have ordered them
2. beneficial b) the amount of freedom you have in order to do sth in the way you want to
3. recession c) to continue to have sth
4. packaging d) to vary from one thing to another
5. warranty e) a person or company that provides goods or services
6. to retain f) having a helpful or useful effect
7. supplier g) a written agreement in which a company selling sth promises to repair or replace it if there is a problem with it within a particular period of time
8. leeway h) a difficult time for the economy of a country when there is less trade and more people are unemployed.
9. scrutiny i) materials used to wrap goods that are sold in shops
10 delivery j) careful and thorough examination

B) Find in the text the antonyms to the following words:

1. supply

2. generic product

3. customer

4. to be reluctant to do sth

5. deflation

6. to reduce the price

7. to ban

II. COMPREHENSION

A) Mark the statements with TRUE or FALSE:

1. Monopoly is a form of competition.

2. There is no product differentiation in pure competition.

3. All sellers offer the same product for sale in monopolistic competition.

4. American automobile industry is an example of pure competition.

5. Product differentiation is a fact of life for the consumers of many goods.

6. A monopolist can set any price he/she wants.

7. In oligopoly there can be 6 sellers.

8. There are more sellers in monopolistic competition than in pure competition.

9. Because of competition from generic products many famous companies are forced to lower the prices of their brand-name products.

10. Oligopolists usually offer similar prices for similar products.

B) Choose the best variant (sometimes 2 variants are possible):

1. Competition offers consumers choices in

a) price c) style

b) quality d) all of the above

2. In order for competition to exist there must be

a) many products

b) 2 or more companies in the same business

c) 2 or more companies in different businesses

d) profits

3. An oligopoly exists when the control of the goods and services is in the hands of

a) 1 large company c) 2 big companies in the same business

b) several small companies d) 10 sizable companies

4. Many real markets are examples of

a) monopoly c) monopolistic competition

b) oligopoly d) pure competition

5. By differentiating his product the producer obtains

a) many consumers c) profit

b) control over price d) monopoly

6. Product differentiation is characteristic of

a) monopoly c) monopolistic competition

b) oligopoly d) pure competition

7. Barriers to enter the market are characteristic of

a) monopoly c) monopolistic competition

b) oligopoly d) pure competition

III. DISCUSSION

1.Comment on the statement: „Business competition encourages efficiency of production and leads to improved product quality”.

2. List the possible advantages and disadvantages of competition.

3. What kind of competition is there in the market of mobile communication in our country?

4. Give examples of monopolies in our country. Why are monopolies prohibited in some countries?

IV. CASE STUDY

Read the following text and answer the questions:

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