{"id":76,"date":"2016-10-03T00:52:57","date_gmt":"2016-10-03T04:52:57","guid":{"rendered":"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/?post_type=chapter&#038;p=76"},"modified":"2017-05-16T00:40:41","modified_gmt":"2017-05-16T04:40:41","slug":"3-1-the-competitive-market-model","status":"publish","type":"chapter","link":"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/chapter\/3-1-the-competitive-market-model\/","title":{"raw":"3.1 The Competitive Market Model","rendered":"3.1 The Competitive Market Model"},"content":{"raw":"<div class=\"bcc-box bcc-highlight\">\r\n<h3>Learning Objectives<\/h3>\r\nBy the end of this section, you will be able to:\r\n<ul>\r\n \t<li>Explain\u00a0the limitations of the Competitive Market Model<\/li>\r\n \t<li>Understand Product Homogeneity, Buyer Power, &amp; Supplier Power<\/li>\r\n<\/ul>\r\n<\/div>\r\n<h1>An Economic Model of Demand and Supply<\/h1>\r\nRecall that an economic model is a simplified framework that is designed to illustrate complex processes. The first model we looked at in Topic\u00a02 was the Production Possibility Frontier, which outlined\u00a0efficient\u00a0production under autarky and under trade. We mentioned that\u00a0although these models can seem oversimplified, holding certain variables constant to analyze the most important ones is an effective way to build a basis of understanding. For demand and supply, we must remain conscious\u00a0of the model\u2019s simplifications to understand its limitations and strengths. The next model we will explore is\u00a0the\u00a0<strong>competitive market model.<\/strong>\r\n<h2>Assumptions of the Competitive Market Model<\/h2>\r\n<h3>1. Product Homogeneity<\/h3>\r\n[caption id=\"attachment_1981\" align=\"alignright\" width=\"196\"]<img src=\"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/10\/shrek-224x300.png\" alt=\"\" width=\"196\" height=\"263\" class=\"wp-image-1981 \" \/> Shrek used to pitch Vidalia onions (Credit: truthinadvertising.org)[\/caption]\r\n<p style=\"vertical-align: baseline;margin: 0cm 0cm 11.25pt 0cm\"><span style=\"color: #1f1f1d\">Under product homogeneity, all goods offered for sale are identical in the eyes of the economic agent. Say, for example, you go to the farmer\u2019s market\u00a0and consider buying onions. Suppose there are two different farms selling identical onions. In this case, the product is \u201chomogeneous,\u201d as you, the consumer, have no preference over which onion\u00a0to buy and will simply go with whichever is cheaper. Instances of perfect homogeneity are actually quite rare, as firms strive to differentiate themselves from their competitors. Farms may position themselves as more organic, or more local. One onion firm even used Shrek to differentiate its onions, playing off the line \u201cogres are like onions, we have many layers.\u201d<\/span><\/p>\r\n\r\n<h3>2. No Buyer Power<\/h3>\r\nUnder the\u00a0assumption of buyer power, no single\u00a0<strong>consumer<\/strong>\u00a0has the power to influence the price at which they <strong>purchase<\/strong>\u00a0a good. For example, your choice whether or\u00a0not to buy a Coke is not going to cause Coca Cola to change\u00a0its prices, since Coca Cola has many other consumers who would will purchase. If you\u00a0are buying a car, you likely have some degree of buyer power, since your purchase results in substantial revenue for the car lot. In a perfectly competitive market, consumers have no buyer power.\r\n<h3>3. No Supplier Power<\/h3>\r\nUnder this assumption, no single\u00a0<strong>producer<\/strong>\u00a0has the power to influence the price at which they <strong>sell<\/strong>\u00a0a good. Consider a small manufacturer attempting to negotiate prices with multinational retail corporation Walmart. The manufacturer will likely have to take the price or go somewhere else. Compare that to Apple supplying an Apple Specialist store, in this case Apple has a lot of power and can likely dictate prices to the retailer.\u00a0In a perfectly competitive market, producers\u00a0have no supplier\u00a0power.\r\n<h2>Are These Realistic Assumptions?<\/h2>\r\nSome of these assumptions are not too far from reality. In fact, the economic climate in which firms operate ranges from instances like these of perfect competition to monopolies, in which one firm sets its own prices. By first understanding the model on one end of the extreme, we can begin to understand the spectrum.\r\n\r\nIn 3.2, we will look at potential buyers on the <strong>demand\u00a0<\/strong>side.\r\n\r\nIn 3.3, we will look at potential sellers on the\u00a0<strong>supply\u00a0<\/strong>side.\r\n\r\nThen, looking at how they interact, we will determine where the\u00a0<strong>market equilibrium<\/strong>\u00a0lies in 3.4.\r\n\r\nLet\u2019s first focus on what economists mean by demand.\r\n<h2>Summary<\/h2>\r\nThe model to examine supply and demand is called the competitive market model. In\u00a0the competitive market, we assume products are homogeneous, and there is no supplier or buyer power.","rendered":"<div class=\"bcc-box bcc-highlight\">\n<h3>Learning Objectives<\/h3>\n<p>By the end of this section, you will be able to:<\/p>\n<ul>\n<li>Explain\u00a0the limitations of the Competitive Market Model<\/li>\n<li>Understand Product Homogeneity, Buyer Power, &amp; Supplier Power<\/li>\n<\/ul>\n<\/div>\n<h1>An Economic Model of Demand and Supply<\/h1>\n<p>Recall that an economic model is a simplified framework that is designed to illustrate complex processes. The first model we looked at in Topic\u00a02 was the Production Possibility Frontier, which outlined\u00a0efficient\u00a0production under autarky and under trade. We mentioned that\u00a0although these models can seem oversimplified, holding certain variables constant to analyze the most important ones is an effective way to build a basis of understanding. For demand and supply, we must remain conscious\u00a0of the model\u2019s simplifications to understand its limitations and strengths. The next model we will explore is\u00a0the\u00a0<strong>competitive market model.<\/strong><\/p>\n<h2>Assumptions of the Competitive Market Model<\/h2>\n<h3>1. Product Homogeneity<\/h3>\n<figure id=\"attachment_1981\" aria-describedby=\"caption-attachment-1981\" style=\"width: 196px\" class=\"wp-caption alignright\"><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/10\/shrek-224x300.png\" alt=\"\" width=\"196\" height=\"263\" class=\"wp-image-1981\" srcset=\"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/10\/shrek-224x300.png 224w, https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/10\/shrek-224x300-65x87.png 65w\" sizes=\"auto, (max-width: 196px) 100vw, 196px\" \/><figcaption id=\"caption-attachment-1981\" class=\"wp-caption-text\">Shrek used to pitch Vidalia onions (Credit: truthinadvertising.org)<\/figcaption><\/figure>\n<p style=\"vertical-align: baseline;margin: 0cm 0cm 11.25pt 0cm\"><span style=\"color: #1f1f1d\">Under product homogeneity, all goods offered for sale are identical in the eyes of the economic agent. Say, for example, you go to the farmer\u2019s market\u00a0and consider buying onions. Suppose there are two different farms selling identical onions. In this case, the product is \u201chomogeneous,\u201d as you, the consumer, have no preference over which onion\u00a0to buy and will simply go with whichever is cheaper. Instances of perfect homogeneity are actually quite rare, as firms strive to differentiate themselves from their competitors. Farms may position themselves as more organic, or more local. One onion firm even used Shrek to differentiate its onions, playing off the line \u201cogres are like onions, we have many layers.\u201d<\/span><\/p>\n<h3>2. No Buyer Power<\/h3>\n<p>Under the\u00a0assumption of buyer power, no single\u00a0<strong>consumer<\/strong>\u00a0has the power to influence the price at which they <strong>purchase<\/strong>\u00a0a good. For example, your choice whether or\u00a0not to buy a Coke is not going to cause Coca Cola to change\u00a0its prices, since Coca Cola has many other consumers who would will purchase. If you\u00a0are buying a car, you likely have some degree of buyer power, since your purchase results in substantial revenue for the car lot. In a perfectly competitive market, consumers have no buyer power.<\/p>\n<h3>3. No Supplier Power<\/h3>\n<p>Under this assumption, no single\u00a0<strong>producer<\/strong>\u00a0has the power to influence the price at which they <strong>sell<\/strong>\u00a0a good. Consider a small manufacturer attempting to negotiate prices with multinational retail corporation Walmart. The manufacturer will likely have to take the price or go somewhere else. Compare that to Apple supplying an Apple Specialist store, in this case Apple has a lot of power and can likely dictate prices to the retailer.\u00a0In a perfectly competitive market, producers\u00a0have no supplier\u00a0power.<\/p>\n<h2>Are These Realistic Assumptions?<\/h2>\n<p>Some of these assumptions are not too far from reality. In fact, the economic climate in which firms operate ranges from instances like these of perfect competition to monopolies, in which one firm sets its own prices. By first understanding the model on one end of the extreme, we can begin to understand the spectrum.<\/p>\n<p>In 3.2, we will look at potential buyers on the <strong>demand\u00a0<\/strong>side.<\/p>\n<p>In 3.3, we will look at potential sellers on the\u00a0<strong>supply\u00a0<\/strong>side.<\/p>\n<p>Then, looking at how they interact, we will determine where the\u00a0<strong>market equilibrium<\/strong>\u00a0lies in 3.4.<\/p>\n<p>Let\u2019s first focus on what economists mean by demand.<\/p>\n<h2>Summary<\/h2>\n<p>The model to examine supply and demand is called the competitive market model. In\u00a0the competitive market, we assume products are homogeneous, and there is no supplier or buyer power.<\/p>\n","protected":false},"author":58,"menu_order":2,"comment_status":"closed","ping_status":"closed","template":"","meta":{"pb_show_title":"on","pb_short_title":"","pb_subtitle":"","pb_authors":[],"pb_section_license":""},"chapter-type":[],"contributor":[],"license":[],"class_list":["post-76","chapter","type-chapter","status-publish","hentry"],"part":69,"_links":{"self":[{"href":"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-json\/pressbooks\/v2\/chapters\/76","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-json\/pressbooks\/v2\/chapters"}],"about":[{"href":"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-json\/wp\/v2\/types\/chapter"}],"author":[{"embeddable":true,"href":"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-json\/wp\/v2\/users\/58"}],"replies":[{"embeddable":true,"href":"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-json\/wp\/v2\/comments?post=76"}],"version-history":[{"count":14,"href":"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-json\/pressbooks\/v2\/chapters\/76\/revisions"}],"predecessor-version":[{"id":2172,"href":"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-json\/pressbooks\/v2\/chapters\/76\/revisions\/2172"}],"part":[{"href":"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-json\/pressbooks\/v2\/parts\/69"}],"metadata":[{"href":"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-json\/pressbooks\/v2\/chapters\/76\/metadata\/"}],"wp:attachment":[{"href":"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-json\/wp\/v2\/media?parent=76"}],"wp:term":[{"taxonomy":"chapter-type","embeddable":true,"href":"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-json\/pressbooks\/v2\/chapter-type?post=76"},{"taxonomy":"contributor","embeddable":true,"href":"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-json\/wp\/v2\/contributor?post=76"},{"taxonomy":"license","embeddable":true,"href":"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-json\/wp\/v2\/license?post=76"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}