Overview
Purpose:
To illustrate the concepts of perfect competition and the elasticity of supply and demand.
Objectives:
1. A competitive industry (or market) is one in which there are many independent buyers and sellers. No one firm or consumer affects a large percentage of the market.
2. Market pressures will force competitive firms to use the least costly method of production and force them to expand production up to the point at which the marginal cost of production equals the market price. (This results in an efficient allocation of resources.)
3. Elasticity is defined as the percentage change in one economic variable, such as sales of automobiles, divided by the percentage change in a related variable, such as the price of automobiles.
a) If the price elasticity of demand is very low (inelastic) there will be large changes in price when there is a sudden increase or decrease in supply.
b) The degree of elasticity depends on the length of the time interval over which it is measured. Elasticities will generally be greater if firms and consumers are given more time to respond.
4. The government has attempted to maintain farm incomes by trying to keep agricultural prices from falling too low. Government programs have tried to support prices by:
a) subsidizing foreign demand for U.S. agricultural products.
b) buying part of the "surplus."
c) encouraging farmers not to produce (acreage restriction programs).
| Key Economic Concepts elastic supply and demand, demand elasticity and total revenue, inelastic supply and demand, price stability and elasticity, unitary elasticity, short-and long-run elasticity, income elasticity, farm price supports, cross-price elasticity perfect competition price=marginal cost efficiency. |
| Contemporary Issues In 2001 and 2002, the American auto manufacturers offered 0% financing for the purchase of new cars. These incentives – which amounted to prices cuts for cars – were put in place in response to sluggish growth in the U.S. economy and rising inventories of unsold cars. The results were quite dramatic. Car sales rose as consumers rushed to take advantage of "an offer they could not refuse". What can the behavior of consumers, in light of these incentives, tell us about the price elasticity of demand for cars? |
|
