Market Equilibrium, Elasticity, and Imperfect Competition

Market Equilibrium and Its Variations

Market Equilibrium: Because the slopes of the demand and supply functions are contrary, there will be a point where they intersect. This point is called the equilibrium quantity. The market equilibrium price represents an agreement between buyers and sellers where the amount consumers want to purchase matches the amount that producers manage to sell.

Elasticity

Elasticity measures changes in quantities demanded or offered in relation to good prices, other good prices, other prices, or consumer income. It is a proportional ratio between the variation in the quantity and the proportional variation of the variable we want to compare it to.

• Demand Price Elasticity: A ratio that measures the relative changes in the quantity demanded of a good or service with respect to the relative changes in its price. Price elasticity depends on initial and final values; it is a concept that applies to a particular section of a demand curve, depending on where we place the initial and final price and quantity.
• Arc Elasticity of Demand: Another way to obtain the price elasticity of demand is through the average price and quantities between initial and final values.
• Cross-Price Elasticity of Demand: Studies the relative changes in the quantity demanded of a good or service with respect to changes in the prices of complementary or substitute goods.
• Income Elasticity of Demand: Studies the relative changes in the quantity demanded of a good or service with respect to relative changes in consumer income.

Artificial Barriers to Market Entry

• Patents and Trademarks: When the state recognizes intellectual property or an invention, it prevents other companies from producing these products.
• Administrative Concessions: In other cases, the state grants a monopoly concession to a company for the operation of a business.
• Regulated Markets and Prices: Sometimes, the state regulates certain minimum or maximum prices that limit competition.
• Monopolistic Public Enterprises: Where the state wants to exploit a monopoly activity.

Limits to Market Control

Barriers to entry exist, but situations of market control have limits because any property or service has a close substitute. If the price rises too much, it could encourage other producers, not previously interested, to compete.

Types of Imperfect Competition (Supply Side)

Imperfectly competitive markets, based on the supply side, can be classified as:

• Monopolies: Where there is a single supplier and many demanders. The monopolist can manipulate the market price to maximize profits. The monopolist acts as a price maker (price bidder), but they know that if prices rise, demand falls; therefore, the demand curve is decreasing with the market price.
• Oligopolies
• Monopolistic Competition Markets