Name Perfect Competition Introduction A market is a place where buyers and sellers meet each in order to exchange goods and services. There are different kinds of markets and these markets are differentiated on the basis of their characteristics…
This writing will focus on markets that are perfectly competitive in nature. This writing will focus on various characteristics of perfectly competitive markets and how buyers and sellers behave in such markets. The first section of the assignment will focus on the reaction of sellers to changes in demand for their goods and services. The second section of the writing will compare and contrast the characteristics of a perfectly competitive market with the characteristics of New York Stock exchange (NYSE). Body According to the law of demand when the demand for a product increases, the price of the product even elevates and vice-verse. Due to these changes in demand the marginal revenue that is being earned by a particular industry even alters. In order to analyze the changes that organizations in a perfectly competitive market experience as a result of changes in demand for a product, let us assume that the product being sold is bread. Let’s assume that according to research, eating brown bread helps individuals in preventing diabetes. Such revelations positively impact the demand for particular product. Let’s assume that the bread industry is a perfectly competitive industry and is currently experiencing long-run equilibrium at a price of $1.7 per loaf of bread and the value of the economic profit is equivalent to zero. Figure 1 Figure 1 is a depiction of short as well as long run adjustment experienced by a firm as well as market under perfect competition. The figure shows that in case of market the price of a loaf of bread is $1.7 when the quantity demanded for the product is at Q1 and in case of an organization that sells loaf of bread the market price of $1.7 is the organization’s marginal revenue which is at MR1. The figure shows that currently there is only one organization in the market. Since the new research suggests that there is health benefit of brown bread, the demand for brown bread increases which is depicted in figure 1 through a shift in the demand curve from D1 to D2. Due to this increase in demand, there is an increase in the price of the product and the price of the product elevates from p1 ($1.7) to P2 ($2.3) and this leads to an increase in the marginal revenue of a single firm operating in a market from MR1 to MR2. Due to this increase in price, the organization even increases its output from q1 to q2 in order to meet consumer demand in the short run (Douglas, 2011, p.615). Notice that the shaded region represents the economic profit that is experienced by the organization in the short run and similar profit will be experienced by other firms in the market in the short run. Since the market is perfectly competitive in nature and there are no barriers to entry or exit, the high stream of economic profit will attract more organizations to enter the market so they can even earn the profits being offered by the recent increase in demand. New organization s will enter the market and this would lead to an increase in the quantity supplied by the entire industry as more and more organizations will enter the market, more and more supply will elevate. New entrants will continue to enter the market as long as their entrance is resulting in an economic profit. Figure one depicts a shift in the supply curve from S1 to S2 which is a reflection of more firms entering the market. Due to this increase in supply, the price of the loaf of bread will start declining in the longer run ...
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