IntroductionThe following is the first part of my
IntroductionThe following is the first part of my microeconomic assignment on question 1 (a). My assignment will explain how equilibrium price and quantity are determined in competitive markets.Main SectionWe know the equilibrium is found where the supply and demand curves intersect. We also know that the equilibrium price (which is the market price) is where the quantity of goods supplied is equal to the quantities of goods demanded. If we look at the main factors that affect demand for a particular product or services (outside price).DemandIncrease/decrease in disposable incomesComplementary GoodsSubstitute GoodsTaste (trends and fashions)Future expectations on prices, availability or incomesSupplyPrice of other related goodsCost of productionTechnologyExternal factorsFuture expectations on prices, availability or incomesAll competitive markets, whether the price is set too high or too low should result in pushing the price towards the equilibrium price. For example, if I set up a new company selling coffee. If the price I charge is too high and above the market rate, then I will have problems selling my product ( assuming that the quality of my coffee is the same as that of my competitors). So then you have to ask yourself, am I willing or able to reduce the price of my coffee. If the answer is no and I don’t reduce the price of my coffee, I will soon find that I will be out of business.So what happens if I sell my coffee below that of my competitors. Well, the obvious question is, can I cover my costs. If the answer is no, it means that if I continue to sell my product below cost over an extended period, this will result in my business being unviable. If I cannot reduce my costs /overheads, then my only option would be to increase the price of the coffee. If we assume that the overheads of my competitors are the same as myself and that the market for coffee is highly competitive, then I would have to match the competitors and the price I charge would end up being the equilibrium price. However, if I was willing to sell the product at a lower profit margin than my competitors, then this may result in the equilibrium price going down.If one of my local competitors closed down their business, it should increase the demand for my coffee. I might then decide to increase the price of my coffee by 10 cents. However, this increase may result in some of my customers either buying elsewhere or looking for alternative products. As the price increased, the demand would decrease. I would have to assess if my profit margin is better selling more coffee at the lower price or less coffee at the higher price.ConclusionWhen dealing with competitive markets the price will have a direct effect on the demand and supply. If the price increases it means that the demand will decrease, which will also mean that the supply will increase. However, if the price decreases then it means that the demand will increase, which will mean that the supply will decrease. In any competitive market, the demand and supply will determine the equilibrium price for a particular product or service. Therefore a change in supply, or demand, or both, will necessarily change the equilibrium price, quantity or both.