Foundations of Economics - Essay Example

No seller has 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 are the maximization of profit, hence they sell where marginal revenues equal the marginal cost. These characteristics are driven by 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 the same, and are determined by the interaction of total market demand and total market supply.

The prices set by individual firms and the industry are the same and are 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 for 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 includes 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 the income of the buyer changes (increases or decreases) depending on whether the product is normally 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 SuppliedQuantity Demandedin A $in kgs in kgs1510004001390060011800800970090086001100701300601600In the diagram, we can see that at $ 15, the quantity demanded is less than the 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 are unaffordable for consumers, the government intervenes to control the prices that it thinks are unfavorably high for the buyers. Thus, using its legal right, the government limits the high prices by imposing a 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 price of bananas greatly burden low and moderate-income households, which led government to intervene for making it affordable for the masses.