In this essay, I want to highlight the main concepts from Chapter 4 of macroeconomic principles and tell you what they mean. I believe the basic concepts are supply and demand, market equilibrium, monopoly, oligopoly, and competition. I can say that the whole economy is built on these concepts, so it is very important to understand each of them.
Supply and Demand
Demand is the relationship between the price and the quantity of a commodity that consumers are able and willing to buy at a strictly defined cost in a specific period. Supply is an economic indicator that represents the market funds, and the total volume of goods or a certain quantity of services, as well as the possibility of sellers and producers, which can be offered at a particular price from a range of possible prices in this particular sales market for a certain period at constant values of other factors.
The Law of Supply and Demand
The law of supply and demand is one of the basic laws of economics, which combines the rule of collection and the law of demand. These laws determine the price of goods because they are formed at the intersection of supply and demand curves. According to the law of demand, the volume of demand increases when the price decreases, and vice versa. Price is the main factor influencing the level of demand. Still, it is also influenced by potential buyers’ wealth level, market saturation, capacity, seasonality and trends, availability of substitute goods, etc.
Market equilibrium is when the plans of buyers and sellers in the market coincide, and at a given price, the value of supply is equal to the value of demand. “When all the resources are fully allocated, the resulting prices and allocation form a market equilibrium”(Nguyen et al., 2018, p. 303). Market equilibrium is not always constant. Change under the influence of non-price factors of demand, supply, or both at once leads to a new state of balance. The new equilibrium prices and volumes can either rise or fall in one or the opposite directions. There are situations where the government intervenes in the equilibrium price-setting process in the market and imposes price controls by setting a price ceiling or floor.
The price “ceiling” is the maximum price level at which a certain good is allowed to be sold. This price is always below the equilibrium price, so there is a constant shortage of goods in the market. This leads to a “black” market, reduces the initiative of sellers to increase the supply of goods in the future, and the capital is gradually moving to other areas of activity. The price “floor” is the minimum price level at which it is allowed to sell a particular product. It is always above the equilibrium level, which leads to a steady surplus of goods and, as a response, to the same black market.
A monopoly is a market with so few sellers that each can influence the total supply and price of a good or service. This ability is called market power. An extreme example is when only one firm operates in an industry, which is a pure (absolute) monopoly. Such a monopolist can be a state company, private firm, or international organization. In the modern world, it is more common to find a situation where a monopolist does not control 100% of the market but dominates it. The extent to which such companies can be considered monopolies is usually legally regulated in each country.
An oligopoly is an economic situation in which a relatively small number of large companies lead the market. Together they have such a market share that if they are combined, you get a pure monopoly. The number of dominant players in a market can be from 2 to 12, but an oligopoly with two players is called a duopoly. An oligopoly is formed naturally. It occurs when some companies become larger than others due to the takeover of smaller businesses or an increase in sales and market share.
Competition is the process of firms fighting for solvent demand, reflecting the essence of industry interaction of firms – strengthening their position by expanding the controlled market share. Perfect competition is a type of competition in which firms do not have market power and compete on price. A characteristic feature of perfect competition is that sellers cannot increase their income by raising prices, and the only available way to achieve economic profit is to reduce production costs, and perfect competition becomes a condition for maximum efficiency of the economy.
Imperfect competition is a mode in which firms with market power compete for sales volume. Imperfect competition is competition between firms of different sizes and costs, other product characteristics and objectives, and other competitive industries.
I think these concepts are fundamental in macroeconomics because they all depend on each other and cannot exist separately. Each term complements the other and significantly affects the market. For example, without demand, there is no supply; without them, there is no market equilibrium. This is why these concepts are indispensable to understand. Without them, it is difficult to understand what macroeconomics is all about.
Nguyen, D. T., Le, L. B., & Bhargava, V. (2018). Price-based resource allocation for edge computing: A market equilibrium approach. IEEE Transactions on Cloud Computing, 9(1), 302-317.