Study sheet: Markets and Competitive Equilibrium

📋 Course Outline

1. State Regulation of Labor Markets
2. Property Rights and Market Institutions
3. Microeconomic Reasoning
4. Perfect Competition Conditions
5. Supply, Demand and Equilibrium
6. Demand, Utility and Elasticity

📖 1. State Regulation of Labor Markets

★ Must-know

📌 The law of 22 March 1841 prohibited children under 8 from working in companies with more than 20 employees.

• The right to strike and freedom of association were established in 1884, paid holidays were introduced in 1936, the SMIG in 1950, and the SMIC in 1970.

Further detail

• In 1840, public opinion was shocked by Doctor Villermé’s report on children’s working conditions in textile factories.

💡 Memory Hook

1841 child labor ban → 1884 strike and unions → 1936 paid leave → 1950 SMIG → 1970 SMIC

📖 2. Property Rights and Market Institutions

🔑 Key Concepts & Definitions

• Patent : a property title over an invention that legally protects the inventor and encourages innovation

★ Must-know

• Article 17 of the Declaration of the Rights of Man and of the Citizen of 1789 declares property to be an inviolable and sacred right.

• The three prerogatives of property rights are:

  • usus: the right to use the asset
  • fructus: the right to derive income from the asset
  • abusus: the right to sell or transform the asset

Further detail

• The European Commission monitors companies and enforces fair competition rules at European level, while the competition authority performs this role nationally, the European Central Bank defines monetary policy in the euro area, and the World Trade Organization regulates markets internationally.

💡 Memory Hook

UFA: usus, fructus, abusus

📖 3. Microeconomic Reasoning

🔑 Key Concepts & Definitions

• Microeconomics : studies the individual behavior of consumers and producers using marginal reasoning and rational comparisons of the costs and benefits of choices
• Homo economicus : The homo economicus seeks to maximize personal interest and minimize costs.

📝 Essential Points

• Marginal reasoning examines how consumer or producer behavior changes with marginal cost, productivity, or marginal utility.

💡 Memory Hook

The homo economicus maximizes personal benefit and minimizes costs, unlike an irrational choice-maker

📖 4. Perfect Competition Conditions

🔑 Key Concepts & Definitions

• Atomicity : requires a very large number of producers and buyers so that no individual actor can influence the price

★ Must-know

• The five conditions of pure and perfect competition are:
  • atomicity
  • freedom of entry and exit
  • product homogeneity
  • information transparency
  • mobility of factors of production

Further detail

• Frank Knight studied the pure and perfect competition market in 1921.

• Barriers to entry or exit may be:

  • financial
  • regulatory
  • technological

💡 Memory Hook

A-L-H-T-M: atomicity, liberty, homogeneity, transparency, mobility

📖 5. Supply, Demand and Equilibrium

🔑 Key Concepts & Definitions

• Market equilibrium : the price and quantity determined by the confrontation of market supply and market demand

★ Must-know

📌 Supply is an increasing function of price because producers offer more when the price rises to maximize profit, whereas demand is a decreasing function of price because consumers demand more when the price falls under their budget constraint.

📌 An excess is a situation of overproduction in which the price is above the equilibrium price and supply exceeds demand, whereas a shortage occurs when the price is below the equilibrium price and demand exceeds supply.

Further detail

• Market supply is the sum of all individual supplies, and market demand is the sum of all individual demands.

💡 Memory Hook

Supply-demand confrontation → equilibrium price and quantity

📖 6. Demand, Utility and Elasticity

🔑 Key Concepts & Definitions

• Marginal utility : the satisfaction provided by the last unit consumed, and it is generally decreasing in economics

★ Must-know

• The three main determinants of demand are:
  • consumer preferences
  • the price of the good
  • the buyer’s income

📐 Formula — The price elasticity of demand is calculated as $e_p = \frac{\text{rate of variation of demand}}{\text{rate of variation of price}}$ and has no unit.

• When price rises from €2 to €4 and demand falls from 40 to 20, the price variation is 100%, the demand variation is −50%, and price elasticity of demand is −0.5.

• The main elasticity cases are:

  • strong elasticity when |e| > 1
  • weak elasticity when 0 < |e| < 1
  • unitary elasticity when |e| = 1
  • rigid demand when e = 0

Further detail

📐 Formula — The rate of variation is calculated as $\frac{\text{final value} - \text{initial value}}{\text{initial value}} \times 100$.

• Giffen goods are necessities whose demand increases when their price increases, as observed by Robert Giffen during the Irish famine; Veblen goods are luxury goods whose high price signals quality and rarity to wealthy consumers, as studied by Thorstein Veblen.

• Thorstein Veblen, a Norwegian born in 1857 and deceased in 1929, studied luxury goods whose price signals quality and rarity.

💡 Memory Hook

Preferences, price, income → utility and demand → elasticity

📊 Synthesis Tables

Market Regulation Institutions

Institution	Level	Main role
European Commission	European	Enforces competition rules
National competition authority	National	Enforces competition rules
European Central Bank	Euro area	Defines monetary policy
World Trade Organization	International	Regulates market functioning