market concepts

By Sahar Dewedar Public Health Ain Sams university

Market is trading of a good or service and the two independent players are Buyers and Sellers Price carries information about value, How Buyers’ willingness to pay = demand and Sellers’ willingness to produce = supply Market is the interaction between supply and demand

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Market structure – identifies how a market is made up in terms of: The number of firms in the industry The nature of the product produced The degree of monopoly power each firm has The degree to which the firm can influence price Profit levels Firms’ behaviour – pricing strategies, non-price competition, output levels ◦ The extent of barriers to entry ◦ The impact on efficiency ◦ ◦ ◦ ◦ ◦ ◦

Perfect Competition

Pure Monopoly

More competitive (fewer imperfections)

Market Structure Perfect Competition

Pure Monopoly

Less competitive (greater degree of imperfection)

Market Structure Pure Monopoly

Perfect Competition

Monopolistic Competition

Oligopoly

Duopoly Monopoly

The further right on the scale, the greater the degree of monopoly power exercised by the firm.

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One extreme of the market structure spectrum Characteristics:

◦ Large number of firms ◦ Products are homogenous (identical) – consumer has no reason to express a preference for any firm ◦ Freedom of entry and exit into and out of the industry ◦ Firms are price takers – have no control over the price they charge for their product ◦ Each producer supplies a very small proportion of total industry output ◦ Consumers and producers have perfect knowledge about the market

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Competition between the few (the industry is dominated by a small number of very large producers)

Concentration Ratio – the proportion of total market sales (share) held by the top 3,4,5, etc firms:

A 4 firm concentration ratio of 75% means the top 4 firms account for 75% of all

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Market structure where the industry is dominated by two large producers

◦ Price leadership by the larger of the two firms may exist – the smaller firm follows the price lead of the larger one ◦ Highly interdependent ◦ High barriers to entry

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Pure monopoly – where only one producer exists in the industry In reality, rarely exists – always some form of substitute available!

Monopoly exists, therefore, where one firm dominates the market Firms may be investigated for examples of monopoly power when market share exceeds 25% Use term ‘monopoly power’ with care!

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Monopoly power – refers to cases where firms influence the market in some way through their behaviour – determined by the degree of concentration in the industry Influencing prices Influencing output Erecting barriers to entry Pricing strategies to prevent or stifle competition May not pursue profit maximisation – encourages unwanted entrants to the market ◦ Sometimes seen as a case of market failure ◦ ◦ ◦ ◦ ◦

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Summary of characteristics of firms exercising monopoly power: ◦ Price – could be deemed too high, may be set to destroy competition (destroyer or predatory pricing), price discrimination possible. ◦ Efficiency – could be inefficient due to lack of competition (X- inefficiency) or…could be higher due to availability of high profits

 Capitalism

or Free Enterprise.  Socialism or Communism.  Islamic or Shari’a.

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Capitalism:- is an economic system that is based on private ownership of the means of production and the creation of goods or services for profit.

Free Enterprise :- An economic system where few restrictions are placed on business activities and ownership. In this system, governments generally have minimal ownership of enterprises in the market place. This system aims for limited restrictions on trade and minimal government intervention.

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Communism:- is a revolutionary socialist movement to create a classless, moneyless, and stateless social order structured upon common ownership of the means of production, as well as a social, political and economic ideology that aims at the establishment of this social order.

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mobilization of funds for health care allocation of funds to the regions and population groups and for specific types of health care mechanisms for paying health care (Hsaio, W and Liu, Y, 2001)

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Multiple payers for the same good.

About 50% of health spending is by private organizations or ‘out-of-pocket’ Most doctors have private practices beside the public services.

Insurance organizations contract with providers . Public and private.

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1. Concept of Demand (“buyers”) - demand curve - influences on demand 2. Concept of Supply (“sellers”) - supply curve - influences on supply 3. Concept of the Market (“exchange”) - interaction of d+s - equilibrium (through price mechanism)

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Consumers purchase those commodities which, subject to their income constraint, maximise their utility “Demand” = willingness and ability to pay for a commodity at each and every price. over a given period of time,

DEMAND CURVE Price $

2

1.50 D=j 0

2

4

No. juce

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(Full ) price of the commodity Prices of other commodities - compliments - substitutes Consumer income/wealth Consumer “tastes” (need?)

INCREASE IN DEMAND A  B caused by fall in price A  C caused by increase in income

Price $

A

2

C

B

1.50

D1 D 0

2

4

No. Mars Bars

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Price elasticity = % change in quantity demanded % change in price Shows responsiveness of demand to price If : PE< 1 = inelastic PE> 1 = elastic PE = 1 = unitary elasticity Main determinant = availability of substitutes

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Firms produce those commodities which, subject to capacity, maximise their profit.

“Supply” = willingness and ability to sell a commodity at each and every price, over a given period of time.

SUPPLY CURVE Price $ S=MC

2

1.50

0

2

4

No. Mars Bars

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Price of the commodity Prices of factors of production (cost) State of technology Other “goals” of firm

INCREASE IN SUPPLY A  B caused by increase in price A  C caused by improved technology

Price $

S S1

B

2

1.50

0

A

2

C

4

No. Mars Bars

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Supply elasticity =

% change in quantity supplied % change in price

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Shows responsiveness of supply to price If: SE < 1 = inelastic SE > 1 = elastic SE = 1 = unitary elasticity Main determinant = flexibility in production

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If you want to increase the supply of a good or service, you can; Increase it’s price Reduce costs of producer inputs Invent new technologies that yield more output per input

price $5.00 B

$4.00 $3.0 0

A

$2.00

Demand

$1.00

200

500

800

1100 1300

quantity

Change in Q divided by (Q1 + Q2)/2 _______________________________ Change in P divided by (P1 + P2)/2

Change in Q divided by (Q1 + Q2)/2 _______________________________ Change in P divided by (P1 + P2)/2 = 600/ (500 + 1100)/2 ___________________________ 2/ (2 + 4)/2 = .75/.66 = 1.10

a) The percent (%) change in the quantity of cigarette cartons demanded by consumers in response to a 1% change in price. b) What is the price elasticity of demand when price changes from $2 to $4, and quantity demanded decreases from 1100 to 500 cartons

price

$

5 4 3

2 1

B

P2

A P1 Q2

200

50 0

D = Demand

Q1

800

1100

130 0

Quantity in cartons

Change in Quantity divided by (Q1 + /Q2)/2 _______________________________ Change in Price divided by (P1 + P2)/2 = - 600/ (500 + 1100)/2 ___________________________ 2/ (4 + 2)/2 = - .75/.66 = - 1.10

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Say government gets all the revenue from the sale of cigarettes. Will a price increase from $2 to $4 per carton result in a net increase of revenue for government?

Answer: No, because demand is elastic. The prior revenue of $2 X 1100 cartons = $2,200; this will fall to $4 X 500 = $2,000

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Elastic: When price goes up by, say, 10%, households respond quite strongly by reducing their demand accordingly, say by 15%. Prices clearly impact on quantity demanded. Often people just choose to purchase other things or cut back on consumption Inelastic: Price increases have less effect on quantity demanded – usually because people really want and need the good or service

Thank you