Story
There are many cookie producers in the world, all of which compete with each other. The price of a cookie determines the number of cookies on the market.
Likewise, there are many cookies lovers in this world. The price of a cookie determines how many cookies will be sold.
So how many cookies will there be in total? At what price will these cookies be sold?
Objectives
This chapter aims to give basic tools to analyze a perfectly competitive market.
- Demand — Determine the quantity demanded given a price
- Inverse Demand — Draw a demand curve
- Consumer Surplus — Measure consumer's gains
- Supply — Determine the quantity supplied
- Inverse Supply — Draw a supply curve
- Producer Surplus — Measure producer's gains
- Equilibrium — Determine the equilibrium price and quantity
- Welfare — Measure overall gains
This chapter has additional topics:
- Price Elasticity of Demand — Calculate the percentage change in demand if the price increases by 1%
- Price Elasticity of Supply — Calculate the percentage change in supply if the price increases by 1%
What can we learn from this?
There are highly competitive products you buy. Typically, staple food (potatoes, coffee, sugar, flour, rice...) are highly competitive products.
Take rice for example. A lone rice producer in Vietnam is small relative to the sheer amount of rice produced in the whole of Vietnam. If this lone producer stops, there will be little to no impact on the market.
Also pretty much everybody is a buyer. You eat rice. Everybody in your family eats rice. Anybody picked at random in the whole world has most probably eaten rice at least a few times. If any one of them stops eating rice for whatever reason, that too will not have a huge impact on the market.
We're talking about scales that humble every single one of us. Yet Perfect Competition helps us conceptualize how everybody, buyers and sellers, interact with every single cup of rice produced on the planet. It may sound silly when you read it, but it is quite something when you think about it.