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CONCEPTS IN ECONOMICS
OBJECTIVES: After studying this chapter, you should be able to:
- understand the concepts of supply and demand and competition
- comprehend how supply and demand determine price in competitive markets
- know what a small business is and name the fields in which small business are concentrated
- describe the people who start small businesses, how some succeed, and why many fail
- understand the contribution of small businesses to economy
1. What forms of competition do you know?
2. What determines the price of a product?
3. Give a definition of the demand for a particular product.
4. Define the supply of a particular product.
SUPPLY, DEMAND, PRICE AND 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 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.
Note that this definition includes several important ideas. First, we are discussing the market for a single product. Second, all sellers offer essentially the same product for sale; a buyer would be just as satisfied with seller A's wheat and with that offered by seller B or seller Z. Third, all buyers and sellers know everything there is to know about the market (including the prices that all sellers are asking for their wheat).
And fourth, the market is not affected by the actions of any one buyer or seller. In pure competition, sellers and buyers must accept the going price. But who determines the price? Actually, everyone does. The price of each product is determined by the actions of all buyers and 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. Let us see how it operates.
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