Economics: Supply and Demand and Market Price Essay

Submitted By jabberton
Words: 1442
Pages: 6

Economics Assignment 2 Joshua Abberton
Applied Writing 110109387

Q1. Assume that milk operates in a perfectly competitive market, use a well labelled demand and supply model to explain how market equilibrium price of milk is being determined.
A perfectively competitive market exists when the following conditions occur: * There are no restrictions on the number of firms either entering or exiting the market * Consumers (buyers) can purchase the good from any seller and still receive the same product * No buyer or seller is large enough to influence the market price * Perfect knowledge about product quality, price, and cost

Sellers have no choice than to except the existing market price. If the seller tries to set a price above the market price, no one will buy their product because potential buyers can simply go and purchase the goods from another supplier at the market price. Pricing an item below the market price will not benefit the seller because any seller can sell as much as it wants to at the market price; selling below the market price will just reduce profits.

The firm can sell as much as it can produce at the existing market price, so demand is not a constraint for the firm. Revenue will be simply the market price multiplied by quantity produced
Equilibrium occurs at the point at which quantity demanded and quantity supplied is equal. Market equilibrium is where a market price is established through competition. Meaning the amount of goods or services sought by buyers is equal to the amount of goods or services produced by sellers.

The equilibrium price can change if there is a change in the supply or demand conditions. Example, an increase in the supply will disrupt the equilibrium this eventually leads to prices being lowered. Eventually, a new equilibrium will be attained in most markets. Then, there will be no change in price or the amount of output bought and sold — until there is an exogenous shift in supply or demand (such as changes in technology or tastes).
Market equilibrium graph below

Q2. Using the same model, explain and illustrate the impact of the glut of milk on the market. Clearly explain the equilibrating process.
Definition of glut- To flood (the market) with a particular item or service so that the supply greatly exceeds the demand. Glut or over supply on the market has taken away the competitive aspect that other markets and companies thrive on. The advantage being that there is a level playing field for all suppliers and buyers. The number of units sold represents the total demand in the market for the product. Revenue is therefore directly related to the demand.
In economics, economic equilibrium is a state of the world where economic forces are balanced and in the absence of external influences the (equilibrium) values of economic variables will not change. For example, in the standard text-book model of perfect competition, equilibrium occurs at the point at which quantity demanded and quantity supplied are equal. Market equilibrium in this case refers to a condition where a market price is established through competition such that the amount of goods or services sought by buyers is equal to the amount of goods or services produced by sellers. This price is often called the competitive price or market clearing price and will tend not to change unless demand or supply changes. (Dixon, H. Equilibrium and Explanation, Blackwells, 1990)

Q3. If you were the Minister for Agriculture in the Victorian Government, and the Victorian Dairy Farmers Association asked you to support their members by imposing a legal minimum price, would you support or reject their request? Use an economic model