Characteristics of Perfectly Competitive Market

Running head: ECONOMICS
SECTION B: PROBLEM SOLVING EXERCISE
Name of the Student:
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1
ECONOMICSTable of Contents
Answer to question 1.......................................................................................................................2
Answer to question 2.......................................................................................................................4
Answer to question 3.......................................................................................................................6
Answer to question 4.......................................................................................................................8
Answer to question 5.......................................................................................................................9
References......................................................................................................................................11

2
ECONOMICS
Answer to question 1
Oranges are homogenous agricultural products and in Adelaide, there are numerous buyers and
sellers for oranges. The buyers and sellers have perfect information and all the sellers are price
takers in the market, as no single seller can influence the market price. At the same time, no
buyer can offer a price that is lower than the market price. High competition in such a market
competition leaves for no extra profit for the sellers and this type of market is known as perfect
competition (Bade and Parkin 2015).
a) Market equilibrium occurs when demand equals supply of oranges. The price is
determined at this point. The sellers cannot modify the price by changing the quantity
supplied and hence, in the short run, the equilibrium is affected by market demand, while
in the long run, both demand and supply influence the market equilibrium. In the long
run, the buyers earn only normal profit at equilibrium. Thus, at the equilibrium,
individual orange sellers must accept the market price and the demand curve represents
the average revenue curve and it is horizontal (Cowell 2018).
b) Under perfect competition, there is no market shortage at the individual level as there is
numerous numbers of sellers in the market. However, if for any disruption in the natural
process of production and supply occurs, such as, natural disaster, then the production is
hampered and there is shortage in the market for oranges. Thus, in such cases, there is
downward movement along the supply curve and the market equilibrium is hampered. It
is shown in the diagram below (Bauer 2018).

3
ECONOMICS
Price
Quantity
S
D
P*
Q*
E*
P1
P2
Surplus
Shortag
e
Figure 1: Market equilibrium, shortage and surplus for oranges in
Adelaide
c) Similar to the situation of market shortage, when there is fall in demand in the market for
oranges due to economic instability in the market, such as, increasing unemployment,
inflation etc. then there is an upward movement along the demand curve and increased
supply of oranges, which pushes the price downward (Bauer 2018). It is also shown in
the diagram above.
d) In a market with perfect competition, the market forces itself comes to equilibrium. When
there is market shortage, the price for oranges will rise due to excess demand. Again,
when the price rises, the supply rises but the demand for oranges fall, leading to excess