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Occurrence and development of economic idea.
2. The subject and the methods of the economic theory.
Structure and functions of economic theory
The Law of Supply
Like the law of demand, the law of supply demonstrates the quantities that will be sold at a certain price. But unlike the law of demand, the supply relationship shows an upward slope. This means that the higher the price, the higher the quantity supplied. Producers supply more at a higher price because selling a higher quantity at higher price increases revenue.
В and С are points on the supply curve. Each point on the curve reflects a direct correlation between quantities supplied (Q) and price (P). At point B, the quantity supplied will be Q2 and the price will be P2, and so on.
Time and Supply
Unlike the demand relationship, however, the supply relationship is a factor of time. Time is important to supply because suppliers must, but cannot always, react quickly to a change in demand or price. So it is important to try and determine whether a price change that is caused by demand will be temporary or permanent.
Let's say there's a sudden increase in the demand and price for umbrellas in an unexpected rainy season; suppliers may simply accommodate demand by using their production equipment more intensively. If, however, there is a climate change, and the population will need umbrellas year-round, the change in demand and price will be expected to be long term; suppliers will have to change their equipment and production facilities in order to meet the long-term levels of demand.
Equilibrium. Shifts and Movements of Supply and Demand.
When supply and demand are equal (when the supply function and demand function intersect) the economy is said to be at equilibrium. At this point, the allocation of goods is at its most efficient because the amount of goods being supplied is exactly the same as the amount of goods being demanded. Thus, everyone (individuals, firms, or countries) is satisfied with the current economic condition. At the given price, suppliers are selling all the goods that they have produced and consumers are getting all the goods that they are demanding.
As you can see on the chart, equilibrium occurs at the intersection of the demand and supply curve, which indicates no allocative inefficiency. At this point, the price of the goods will be P* and the quantity will be Q*. These figures are referred to as equilibrium price and quantity.
In the real market place equilibrium can only ever be reached in theory, so the prices of goods and services are constantly changing in relation to fluctuations in demand and supply.
For economics, the "movements" and "shifts" in relation to the supply and demand curves represent very different market phenomena:
1. Movements
A movement refers to a change along a curve. On the demand curve, a movement denotes a change in both price and quantity demanded from one point to another on the curve. The movement implies that the demand relationship remains consistent. Therefore, a movement along the demand curve will occur when the price of the good changes and the quantity demanded changes in accordance to the original demand relationship. In other words, a movement occurs when a change in the quantity demanded is caused only by a change in price, and vice versa.
Like a movement along the demand curve, a movement along the supply curve means that the supply relationship remains consistent. Therefore, a movement along the supply curve will occur when the price of the good changes and the quantity supplied changes in accordance to the original supply relationship. In other words, a movement occurs when a change in quantity supplied is caused only by a change in price, and vice versa.
2. Shifts
A shift in a demand or supply curve occurs when a good's quantity demanded or supplied changes even though price remains the same. For instance, if the price for a bottle of beer was $2 and the quantity of beer demanded increased from Q1 to Q2, then there would be a shift in the demand for beer. Shifts in the demand curve imply that the original demand relationship has changed, meaning that quantity demand is affected by a factor other than price. A shift in the demand relationship would occur if, for instance, beer suddenly became the only type of alcohol available for consumption.
Conversely, if the price for a bottle of beer was $2 and the quantity supplied decreased from Q1 to Q2, then there would be a shift in the supply of beer. Like a shift in the demand curve, a shift in the supply curve implies that the original supply curve has changed, meaning that the quantity supplied is affected by a factor other than price. A shift in the supply curve would occur if, for instance, a natural disaster caused a mass shortage of hops; beer manufacturers would be forced to supply less beer for the same price.
Elasticity of a supply and demand. Kinds of elasticity.
Change of size of demand under influence of dynamics of the price possesses one more surprising property which has received the name « price elasticity of demand ». If little change of the price causes significant change of size of demand such demand has received the name « elasticity of demand »; even if very big change of the price only little changes size of demand such demand has received the name "not elastic".
A Demand of uniform elasticity
B Elastic demand
C Not elastic demand
As a rule, not elastic demand is observed on production of agrarian sector. Therefore the prices for it, as well as for other, vital goods (bread, salt, matches), always are under the control of the state.
The factor of elasticity is influenced mainly with three factors.
Distinct from elasticity of demand the graphic representation of elasticity of the offer appears also.
A- the offer unique
elasticity
B- the elastic offer
C- not elastic offer
The situation of not elastic offer guaranteeing stability of manufacture at sharp change of the price is more attractive to the seller. The size of the offer is influenced also with an economic conjuncture the situation developing on market of the given goods during the certain period (increase, high, and decrease понижательная, low).
And as the size of the offer depends on a level of a competition in given branches (competition). The size and structure of the offer reflect a tax policy of the state: tax privileges are stimulated with manufacture.
Theme 5 The market and competition
Interaction between a supply and demand, as is known, occurs in the market.
In system of market relations buyers and sellers freely exchange the blessings in many competitive markets. The competition is the mechanism which solves all economic problems of a society. In translation with Latin it means "to converge, "collide ("face)". This free rivalry between manufacturers and buyers for receptions of the maximal income. In view of conditions in which the competition proceeds, economists distinguish some types of structure of the market. The market structure offers the account of quantity and opportunities of sellers (buyers) in the price and a sales volume (purchases). Therefore in the economic theory allocate four types of market structure: the perfect competition, monopoly, a monopolistically competition, oligopoly.
At presence of a competition in the market manufacturers with the purpose of reception of the maximal profit – aspire to lower production costs on a unit of production. As a result of it the opportunity of reduction of price that increases a sales volume at the manufacturer and its incomes is created. The most effective way of achievement of it is use of scientifically technical improvements and novelties in manufacture.
The competition creates at manufacturers’ stimulus to a constant variety of the offered (suggested) goods and services for a gain of the market.
Manufacturers carry out constant struggle for the buyer in the market. Result of such struggle is the politics of stimulation of selling who comprehensively studies consumer demand and creates new forms and methods of sale of goods. All this, on the one hand, increases there arrived firms, and on the other hand, meets all desires and requirements of the buyer. In a result wins both the consumer, and a society as a whole.
The perfect competition exists in such fields of activity where fine sellers and buyers of the identical goods operate many and consequently any of them is not capable to affect the price of the goods.
Here the price is defined by free game of a supply and demand according to market laws. This type of the market name « the market of a free competition ».
Existence of huge quantity of buyers and sellers means, that any of them does not own the greater information on the market, than the others. The seller, having come on the market, finds already developed price level, to change which not in his authority; - in fact the market itself dictates the price during each moment of time.
The basic characteristics of the market of the perfect competition:
- a plenty of fine sellers and buyers,
- the sold product is homogeneous at all manufacturers, and the buyer can choose any seller of the goods for realization of purchase,
- the impossibility of the control over the price and volume of sale and purchase creates conditions for constant fluctuation of these sizes under influence of change of market conditions,
- full freedom of "input" on the market and "leaving".
The monopoly is a complete antipode of the perfect competition. Here there is only one seller, and he makes the goods which are not having close substitutes.
In conditions of monopoly the manufacturer is capable to supervise completely volume of the offer of the goods that allows him to choose any price from possible according to a curve of demand, expecting thus to receive the maximal profit.
Aspiration of a monopolist to maximization arrived by an establishment of the control over the price and a sales volume there is an infringement of a free competition and the statement special authorities in the market. « The market authority » means ability of the seller (buyer) to influence the price of the goods.
Distinctive features of monopoly from the perfect competition:
- the unique seller (monopolist),
- the sold product is unique, therefore the buyer is compelled to pay the price established by a monopolist (or to refuse purchase of the given product),
- The full control a monopolist above the price of the goods and a sales volume,
- For potential competitors the monopolist establishes formidable barriers.
The special place occupies « natural monopolies ». The enterprises of public using concern to them and the enterprises maintaining unique natural resources (the electric and gas enterprises, the companies of water supply, the communication line and transport firms). Similar « natural monopolies » are in the property of the state or operates under its control.
The monopoly arising on the part of demand when in the market there is only one buyer at set of sellers refers to monopsony.
Monopolistically competition it be relative a plenty of the manufacturers suggesting similar, but not identical (from the point of view of buyers) production.
As against the perfect competition monopolistically assumes, that each firm sells special type of the goods which differs quality, registration, prestigious ness due to what the consumer has « not price preferences ».
Oligopoly is the prevailing form of modern market structure. The term "олигополия" is applied in economy to the description of the market on which there are some firms separate from which supervise a significant share of the market.
On oligopoly the market some large firms (from three up to five) compete among themselves and the introduction on this market of new firms is complicated. Production made by firms, can be both is homogeneous, and is differentiated. Uniformity prevails in the markets of raw material and semi finished items: oil, steel, cement; differentiation in the markets of consumer goods (automobiles).
Small number of firms on the oligopoly market forces these firms to use not only price, but also not price competition. Manufacturers know that if they will lower the prices their competitors will make the same that will lead to falling of incomes. Therefore instead of a price competition which is more productive in conditions of the perfect competition, «oligopoly tics" use not price methods of struggle: the technical superiority, reliability of a product, methods of selling, advertising etc.
Prominent feature the oligopoly market – dependence of behavior of each firm on reaction and behavior of competitors.
Cruelty of the prices so refers to practice of actions oligopoly firms when, even at change of costs or the demand, certain by firms it is not inclined to change of the price. It believes that if it should raise the price others will follow it that will lead to loss of a part of the market. By such way of firm are kept from change of the prices because of fear to untie « war of the prices »
Leadership in the prices means practice when at formation of the prices for production the company is guided by the prices established by the leader more often dominating in given branch and in the given market of a large firm.
Patent pools this agreement on specialization and cooperation of manufacture, and a consortium association of firms with the purpose of carrying out of the common scientific researches.
The cartel represents the agreement of the several enterprises establishing for all participants volume of manufacture, the price for the goods, conditions of hiring of a labor, an exchange of patents, a share of each participant in total amount of manufacture and selling. Its purpose is increase of the prices (over a competitive level), but not restriction of industrial activity of participants.
Antimonopoly policy
The competition is the most effective means of achievement of the purposes of market economy and interests of all members of a society.
When businessmen enter into among themselves the agreement on section of the market or a level of the price consumers are compelled to pay a big price for the goods and to reduce volume of consumption. The prices in this case become artificial high and not all buyers presume to get to themselves the same goods in desirable volumes. Consumers incur economic losses from suppression of a competition.
To avoid these negative phenomena, the state interferes with market processes, using antimonopoly regulation: the administrative control above монополизированными the markets, the organized mechanism and the antimonopoly law.
The administrative control monopolized markets unites ways of influence on монополизированное manufacture (the financial sanctions used in case of infringement of the antimonopoly law).
The organizational mechanism not mentioning monopoly as a mode of production, ways and methods of such policy of the state are aimed at making monopolistically behavior for large business unprofitable. This decrease in the customs, a cancellation of quantitative quotas, support of small business, optimization of manufacture, etc.
The most effective and advanced form of state regulation of exclusive
authority is the antimonopoly law. Its purpose is regulation of structure
of branch through prohibition of prospective merges of large firms if
it conducts to essential easing a competition or an establishment of
monopoly.
Characteristic attributes of the basic markets
Attributes |
The perfect competition |
Monopolistically competition |
Oligopoly |
Monopoly |
Number of firms |
Set of fine firms |
It is a lot of firms |
Some large firms |
One largest firm |
Type of a product |
identical |
Differentiated |
Identical or differentiated |
Unique |
Conditions of the introduction on the market |
Very easy |
Rather easy |
Essential obstacles |
Very difficult |
The control over the prices |
no |
It is limited to an opportunity of replacement of the goods |
Priority price the leader |
The full control |
Theme 6: Enterprise. The theory of firm. The organization of activity firms. The market of resources and formation of incomes
Millions managing subjects which purpose is the profit participate in a modern national facility. Among them — what can be named economic agents, — domestic facilities, the state as a whole and its managing structures, banks, insurance and credit societies, the individual enterprises and companies, joint-stock companies, etc. Besides in each country economic agents function the inherent in the given national facilities.
The market economy has put forward firm the most effective form of the organization of functioning of economic agents. The businessman acts as the main character in firm.
Business. Being the main subject of market economy, the businessman realizes economic relations of the property inherent in it in their legal registration through the certain organizational mechanisms of the activity.
Business (enterprise activity) always was one of the major subjects of researches of an economic science as the businessman is the main character of a market economy. Now there is a set of definitions of business essence. If to try to allocate into them the general it will be reduced to the following:
1) The purpose of enterprise activity is reception of the profit, excess of the monetary proceeds received from sale of goods, over expenses (costs) on its manufacture and realization;