Supply And Demand - Chapter 3 Page 4
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37Chapter 3: Supply and Demand
55
F I G U R E
1
The Circular Flow Model
Product
The outer loop of the
Markets
diagram shows the flows
of goods and resources, and
the markets in which they
are traded. Households
sell resources to firms in
resource markets. Business
firms use the resources
to produce goods and
services, which they sell
to households in product
Business
markets. The inner loop
Households
Firms
shows money flows.
The resource payments
made by firms become
income to households.
Households use the income
to purchases goods and
services from firms.
Resource
Markets
In imperfectly competitive markets, individual buyers or sellers can
Imperfectly competitive market
influence the price of the product.
A market in which a single buyer
or seller has the power to
influence the price of the product.
But now think about the national market for wheat. Can an individual seller
have any impact on the market price? Not really. On any given day there is a going
price for wheat—say, $5.80 per bushel. If a farmer tries to charge more than that—
say, $5.85 per bushel—he won’t sell any wheat at all! His customers will instead go
to one of his many competitors and buy the identical product from them for less.
Each wheat farmer must take the price of wheat as a “given.”
The same is true of a single wheat buyer: If he tries to negotiate a lower price
from a seller, he’d be laughed off the farm. “Why should I sell my wheat to you for
$5.75 per bushel, when there are others who will pay me $5.80?” Accordingly, each
buyer must take the market price as a given.
The market for wheat is an example of a perfectly competitive market.
In perfectly competitive markets (or just competitive markets), each buyer
Perfectly competitive market
A
and seller takes the market price as a given.
market in which no buyer or
seller has the power to influence
the price.
What makes some markets imperfectly competitive and others perfectly compet-
itive? You’ll learn the complete answer, along with more formal definitions, when
you are further into your study of microeconomics. But here’s a hint: In perfectly
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