Equilibrium Price, Competition, Monopoly and Oligopoly

Nobody is holding the pen

Ask who sets the price in an ordinary market, and the honest answer is that nobody does. No one person and no committee chooses it. It settles, on its own, at the one figure where the amount buyers want to buy is exactly equal to the amount sellers want to offer. That figure is called the equilibrium price, and the quantity traded at it is the equilibrium quantity. ⭐⭐ THE REASON IT SETTLES THERE, AND STAYS THERE, IS THAT EVERY OTHER FIGURE UNDOES ITSELF. Set the price too high and sellers bring more than buyers will take. Goods go unsold, stock builds up, and sellers cut what they charge to move it. The price falls. Set the price too low and buyers want more than sellers will offer. People are left empty-handed, they bid against each other for what little there is, and the price rises. ⭐ ONLY AT ONE FIGURE IS THERE NO UNSOLD PILE AND NO DISAPPOINTED QUEUE, SO ONLY AT THAT FIGURE IS THERE NOTHING PUSHING THE PRICE ANYWHERE. THE MARKET HAS FOUND ITS OWN LEVEL. This is also how a market decides what gets made and for whom, with no one in charge: the goods people want most bid resources toward themselves, and the goods no one wants let their prices fall until making them is not worth it. ⭐⭐ NOW THE SECOND HALF OF THE STORY, AND IT IS THE PART EXAMINERS RETURN TO. FINDING A PRICE IS ONE THING. WHOSE SIDE THAT PRICE FALLS ON IS ANOTHER, AND IT DEPENDS ON HOW MANY SELLERS SHARE THE MARKET. Where many sellers compete, a buyer charged too much simply goes to the next one, so the pressure is on the price to come down toward the side of buyers, and on sellers to keep quality up. ⚠️ WHERE ONE SELLER DOMINATES WITH NO CLOSE RIVAL, A MONOPOLY, OR WHERE A FEW LARGE SELLERS SHARE THE MARKET BETWEEN THEM, AN OLIGOPOLY, THAT PRESSURE IS WEAK. BUYERS HAVE FEWER PLACES TO GO, SO THE PRICE CAN BE HELD UP TOWARD THE SIDE OF PRODUCERS. Carry both halves through the module in one sentence: the market finds a price on its own, and the amount of competition decides whose side that price is on.

Too dear, too cheap, or just right

A price can only ever be in one of three states. Two of them contain the seed of their own correction, and the third is where the market comes to rest.

Tap the two signs of a price set too high

A market has settled at the wrong figure for the moment. Tap the TWO things you would see if the price has been set ABOVE the point where the two curves meet.

• Sellers are left with goods they could not sell by the end of the day
• Buyers form long queues and many walk away with nothing
• Sellers begin marking things down to shift what is piling up
• Buyers offer more than the asking figure to secure the last few

So who actually chose the number?

In an ordinary market with no one in charge, how does the price end up at the figure it does?

• Nobody chooses it directly; it settles where the quantity buyers want equals the quantity sellers offer, and any other figure sets off pressure that moves it back there
• The largest seller picks it and every other seller copies that figure
• The government works it out for each market and fixes it in advance
• Buyers hold a vote and agree the figure between them before trading begins

The six words this module rests on

Six terms, each defined by what it is. The last three are the difference between a price that favours buyers and one that favours producers.

Match each market state to what happens next

Two things that follow from a self-correcting market

Select the TWO statements that follow from a market correcting its own price.

• A price set too high does not last, because the unsold goods it creates push it back down on their own
• A price set too low does not last either, because the buyers left with nothing bid it back up
• Once a market reaches its resting price, nothing can ever move it again
• Reaching the resting price needs someone to calculate it and announce it to everyone first

How the number of sellers tilts the price

Finding a resting price and deciding whose side it lands on are two different questions, and the second one turns almost entirely on how many sellers there are. ⭐⭐ START FROM WHAT A BUYER CAN DO WHEN THE PRICE FEELS TOO HIGH. Where sellers are many, the buyer walks to the next one. That single fact does the work: every seller knows a figure set too high sends custom next door, so each has a reason to keep the price down and the quality up. The pressure runs toward the side of buyers, and that is what competition means on this course. ⚠️ WHERE ONE SELLER DOMINATES, A MONOPOLY, THE BUYER HAS NOWHERE ELSE TO GO. The threat of walking away is empty, so the seller can hold the price up toward the side of producers. Buyers pay more and get less than they would in a crowded market. ⚠️ WHERE A FEW LARGE SELLERS SHARE THE MARKET, AN OLIGOPOLY, EACH WATCHES THE OTHERS. None wants to start cutting prices, because the others would follow and all would earn less, so prices tend to sit together and move together rather than being driven down hard. How to answer a question on this cleanly. ⭐ FIRST SAY HOW MANY SELLERS THERE ARE, BECAUSE THAT DECIDES EVERYTHING THAT FOLLOWS. Then say what a buyer can do about a high price: go elsewhere, or not. Then say which way the pressure runs, toward buyers or toward producers. ⚠️ DO NOT SAY A LONE SELLER CHARGES MORE BECAUSE IT IS GREEDY OR WORKS HARDER. ⭐ THE REASON IS STRUCTURAL, NOT MORAL: IT CHARGES MORE BECAUSE NO RIVAL IS PULLING THE PRICE DOWN. THE SAME FIRM IN A CROWDED MARKET COULD NOT DO IT. And keep the two halves of the module joined. Competition does not set the resting price on its own; the meeting of demand and supply still does that. What competition decides is whose side the resting price ends up favouring.

One seller, or a crowded street of them

Two markets sell the same kind of good. One has many sellers along a busy street; the other has a single seller with no rival nearby. Why does the price tend to sit lower where there are many sellers?

• Because a shopper who is overcharged just buys from a neighbour a few doors along, and a seller who keeps losing those sales cannot last, so the figure is dragged down to what shoppers can find elsewhere
• Because a single dominant seller is forced to lower the price, having no one to answer to
• Because a few large sellers always cut prices hardest, precisely because there are several of them
• Because the number of sellers makes no real difference to the price a market settles on

Order the way a surplus clears itself

Put these six steps into the order in which a market removes a price that has been set too high.

• The price starts above the point where the two curves meet
• Sellers offer more than buyers are willing to take at that price
• The goods that go unsold begin to pile up as stock
• Sellers cut what they charge to move the stock they are left with
• As the price falls, buyers take more and sellers offer less
• The price stops falling once the two quantities are equal again

Build the sentence that explains the correction

This is the sentence that earns the marks when a question asks why a price does not stay too high. Assemble it.

The market clears, five times over

Five questions across equilibrium and competition. Three lives.

A tank, a tap, and a plughole

Forget markets for one screen and picture a tank of water with a tap running in at the top and an open plughole draining out at the bottom. Nothing here is about buying or selling, and yet it behaves in exactly the way this module describes. The clever part is the plughole. The deeper the water, the harder it presses down, so the fuller the tank the faster it drains. Drainage is not fixed; it rises and falls with the level itself. ⭐ NOW OPEN THE TAP TO A STEADY TRICKLE AND WALK AWAY. AT FIRST MORE COMES IN THAN GOES OUT, SO THE LEVEL RISES. BUT AS IT RISES, THE PLUGHOLE DRAINS FASTER, UNTIL WATER LEAVES AT EXACTLY THE RATE IT ARRIVES. THE LEVEL STOPS MOVING. IT HAS FOUND ITS OWN HEIGHT, AND NO ONE CHOSE THAT HEIGHT. Push the level up by hand and let go: the fuller tank drains faster than the tap fills it, so it sinks back to the same height. Hold it down and let go: now the tap outpaces the slow drain of a shallow tank, and it climbs back. The height is not set by anybody. It is the one level where what comes in and what goes out are in balance, and the tank returns to it whenever it is disturbed. ⭐⭐ CHANGE ONE THING FROM OUTSIDE, SAY OPEN THE TAP WIDER, AND A NEW BALANCING HEIGHT APPEARS FURTHER UP. THE TANK THEN SETTLES THERE INSTEAD, IN JUST THE SAME WAY. Keep that picture in mind for what comes next. A figure that no one sets, that holds steady only where two opposing flows are equal, and that returns to itself whenever it is pushed away, is exactly the behaviour you have just watched in a tank of water.

Complete the market-price facts

The figure at which the quantity buyers want to buy equals the quantity sellers want to offer is the _____ price. When the price is set above that figure, sellers are left with a _____ of unsold goods. When it is set below that figure, buyers face a _____ and some go without. A market supplied by a single dominant seller with no close rival is a _____.

Fix three market answers

Three students answer questions on price and competition. The idea behind each is roughly right; the answers are what need work.

• A student writes that the government sets the price in a free market. What needs correcting?
• A student says a shortage will simply continue, because buyers cannot get what they want. Where is the gap in the reasoning?
• Asked why a lone seller can charge more than a seller in a crowded market, a student answers that the lone seller simply works harder. What is the real reason?

Explain how the price settles, and who it favours

A town has a market for a simple everyday good. Explain how the price of that good reaches its resting figure and what happens if it is set too high or too low, then explain how the number of sellers changes whose side the price ends up on.

• State that no one sets the resting price, and say what it settles at
• Explain what happens when the price is set above the resting figure, using the idea of unsold stock
• Explain what happens when it is set below, using the idea of buyers bidding against each other
• Say clearly why the price stops moving once it reaches the resting figure
• Explain how many competing sellers push the price toward the side of buyers
• Explain how a single dominant seller, or a few large ones, can hold the price up toward the side of producers
• Finish with one sentence saying what decides the resting price and what decides whose side it favours