Market size effect
The market size effect is the effect that the size of the market for a good (i.e., the number of potential consumers) has on the quantity traded and the price of the good.
First, note that the market size effect leads to an expansion of the market demand curve, assuming that there are no significant compositional changes in the nature of individual demand curves for existing consumers.
There are several different aspects of the market size aspect:
|Effect on||Nature of effect and explanation|
|quantity traded||Under reasonable assumptions, an increase in market size leads to an increase in the quantity traded, even assuming there are no changes to the market supply curve.|
|market price|| If the supply curve slopes upward, an increase in market size leads to an increase in the market price. This is typically the case when we look at short-run supply curves for most goods.|
If the supply curve slopes downward, an increase in market size leads to a decrease in the market price. This is typically the case when we look at long-run supply curves for goods in a decreasing cost industry. This includes many knowledge goods with high fixed research and development costs.
|rationales for public goods||The larger the market for a public good, the greater the utilitarian justification for its provision, based on a strict cost benefit analysis. However, this does not directly translate to its provision because of the free-rider problem associated with public goods. In a sense, an increase in market size solves one problem (too small a target market for a public good to be worth the cost) but creates another (a public good that is worth the cost from the perspective of a cost benefit analysis that does not get produced due to the free-rider problem).|