Economic Terms

A new organisation formed to replace many of the functions performed by the Competition Commission and the Office of Fair Trading. The organisation becomes effective from April 2014. Its purpose is to promote competition and make markets work well for consumers, businesses and the economy.

Markets where number of substitutes exist and one good can be purchased instead of another good.

Below is a diagram to illustrate two substitute products in a supply and demand framework. Beef and pork are both substitutes as most consumers class them as similar goods and very rarely buy both goods at the same time. A fall in the supply of beef creates excess demand and the price of beef rises, leads to a sharp fall in demand . However, because the price of beef is higher consumers to switch to a cheaper substitute (pork) and as a result this forces the demand for pork up as it is a key substitute to beef.

Are markets in which no individual buyer or seller can influence the market outcome.

Below is a diagram to illustrate a competitive market using a supply and demand framework. In this market an equilibrium price is reached by demand and supply equalising and the goods that are produced at this price get allocated to those consumers which value them the most. Any disequilibrium is soon cancelled out via market forces i.e. the price mechanism.

A good which is purchased alongside another good as the combined outcome helps to satisfy a want or desire e.g. milk and tea

A good which is purchased alongside another good as they need to be consumed together to satisfy a want or desire.

Below is a diagram to illustrate complementary goods in a demand and supply framework. Pasta and pasta sauce are two goods which need to be consumed together and therefore are complementary goods. As the diagrams below show, an increase in supply of pasta leads to a fall in the price due to excess supply. If the price of pasta falls, demand increases for pasta but this will also cause the demand for pasta sauce to increase as they are complementary goods. Hence why the demand curve for pasta sauce shifts outwards.

When a market completely fails to provide a good or service. This is largely restricted to pure public goods e.g. defence.

Below is a diagram to illustrate market failure which is created with pure public goods such as national defence. There is market failure because despite a demand for these types of goods nobody in the market is willing to supply them because of the free-rider problem.

A situation where a good is demanded for a variety of different reasons e.g. timber is demanded to make houses, furniture, paper and many other purposes.

Below is a diagram to illustrate composite demand for a product that has many uses in alternative markets, oil. In the diagrams below an increase in demand for oil from plastic producing firms, has to result in a fall in the supply of oil in the petrol market as oil is a composite product has lots of alternative uses. This logic could be applied to other products such as bread and steel.

A form of regulation when companies are forced to down size by selling parts of their business e.g. The EU ordered Lloyds Bank plc to sell parts of their retail banking business after it merged with HBOS plc.

Summarises how much of the entire market the largest firms control.

Below is an illustration of how to calculate a specific n-firm ratio. In this case to find the 3-firm concentration ratio (the combined market share of the three largest firms) all that is required is to identify the three firms with highest market share and add these sums together as shown. The fact that the ratio is 77%, signifies that this is not a very comeptitive market as these three firms control over three quarters of the market.

These are public goods that become rival when they are heavily used e.g. during rush hour the usage of roads by each additional car causes congestion that diminishes the utility of other drivers. By charging a toll to control congestion the good becomes excludable during toll hours.