Perfectly competitive markets Essay Example | Topics and Well Written Essays - 1500 words

Perfectly competitive markets - Essay Example No seller has a bargaining power over another because the products sold in perfectly competitive markets are assumed to be homogenous in nature. Lastly, the motives of the seller participants is maximization of profit, hence they sell where marginal revenues equal the marginal cost. From these characteristics is driven the 'price taker' nature of firms in the market. Hence it is safely inferred that in such markets the prices set by individual firms and the industry are same; and is determined by the interaction of total market demand and total market supply. The prices set by individual firms and the industry is same; and is determined by the interaction of total market demand and total market supply. From the above graph, it is visible that when both quantity demanded and quantity supplied is at the same level i.e. 800 kgs, there the market will reach equilibrium. At that point, the equilibrium price is $11 per kg. The prices of products are impacted either by a change in the demand of that product, or when the supply of that particular product changes. Bade, Parkin and Wesley (2008) said on the demand side, the change in demand factors including changes in consumer tastes by preferring a certain product over another, when then is an increase in the number of buyers for the product, or when income of the buyer changes (increases or decreases) depending on whether the product is normal good or inferior good. The change in the prices of related products also impacts the demand. On the supply side resource prices, technology, taxes and subsidies, prices of other goods and anticipation of future price changes and the number of suppliers affect the supply. Cyclone Larry increased the price of bananas because it wiped out the banana crop in Queensland, which reduced the quantity supplied of bananas into the market, hence a movement on the supply curve; which led to the increase in the prices of bananas. Price Quantity Supplied Quantity Demanded in A $ in kgs in kgs 15 1000 400 13 900 600 11 800 800 9 700 900 8 600 1100 7 0 1300 6 0 1600 In the diagram, we can see that at $ 15, the quantity demanded is less than quantity supplied, which means 'many consumers could not afford to buy them'. Question 3: In controlling the price of bananas, which have reached a certain high and is unaffordable for consumers, the government intervenes to control the prices that it thinks are unfavorably high for the buyers. Thus, using its legal right, government limits the high prices by imposing the price ceiling (Lipsey & Chrystal, 2007). Here, we demonstrate the impact of price ceilings graphically. In our case, Cyclone Larry has adversely impacted the crop of bananas, and has reduced the supply of bananas. At this level, quantity demanded increases relative to quantity supplied. This increases the equilibrium or the market price. This rapidly rising prices of bananas greatly burdens low and moderate income house holds , which leds government to intervene for making it affordable for the masses. It imposes a ceiling price of A $ 8 per kg. For this to be effective, the price ceiling is less than the equilibrium price, which in our example as earlier