Pear Market: A Perfectly Competitive Market

MICROECONOMICS
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Question 1
a) In accordance with the given information, the sale of pears constitutes a perfectly
competitive market. This essentially implies there are multiple buyers and sellers in the pear
market and no one market participant is big enough to influence the market parameters.
Additionally, the pears sold by each of the sellers would be homogeneous and hence no
product differentiation would exist in this market. The sellers are essentially price takers in
such a market. The equilibrium price of the pears would be dependent on the intersection of
industry demand and supply rather than the choices made by individual sellers and buyers
(Arnold, 2017).
Owing to the bumper pear crop, there would be an increase in the total pears supply which is
reflected in the shift of supply curve from S to S1 as indicated below.
However, the demand curve for pears does not witness any change and as a result of this
variation in demand supply scenario. However, the demand curve for pears does not witness
any change and as a result of this variation in demand supply dynamics, there is a decrease in
the equilibrium price of pear due to shift in the intersection point. Considering the underlying
market dynamics, the various sellers would now be forced to sell the pears at this price which
would lower their profits or can potentially lead to losses in the short run. In the given case
the new price is P1 from the original P and all the profits which was earlier being made has

been wiped off on account of the lower prices coupled with lower equilibrium quantity
(Mankiw, 2014).
b) The expectation of a bumper crop would imply that it is expected that the prices would
plummet. However, due to the market being perfect competition, then individual sellers or
producers cannot through their decision impact the supply. Thee buyers also are fragmented
in the perfect competition and hence they cannot make economic decisions which would
potentially avoid the creation of a glut of pears in the market (Krugman and Wells, 2017).
However, the current equilibrium conditions would start altering in expectation of the future
glut. It is possible that there might be an increase in the supply of pears in the current market
as the sellers may aim to sell all their inventory of pear at hand as the future prices are
expected to be lower. Also, the buyers would attempt to postpone their purchase to a later
date. The net result is that there would be a downward revision in price coupled with higher
offtake of pears assuming that decrease in demand would be lower than increase in supply as
indicated below (Mankiw, Mankiw and Taylor, 2017).
It is apparent that there would be a fall in the prices from P to P1. However, there has been an
increase in the overall equilibrium quantity from Q to Q1.
Question 2
On account of the increased supply of pears, a related market that may be impacted is that of
apples. This is because apple and pears are close substitutes and hence price of one product
would have an impact on the other. For this analysis, it has been assumed that apple and pears
are perfect substitutes and also that the apple market behaves similar to the pear market. In
the given case, it is apparent that on account of a bumper pear harvest, there would an
increase in the supply coupled with falling price of pear in the market. This could potentially

lead the consumers of apple to shift to pears on account of lower prices and thereby pear
would act as a cheaper substitute. As a result, there would be a fall in the demand for apples
the impact of which is indicated below (Pindyck and Rubinfeld, 2015).
Because of the lower demand, the apple demand curve shifts from D1 to D2. However, the
supply curve does not change in the short term. The net result of this change is that there is
change in the intersection point of the demand curve and supply curve leading to change in
equilibrium. The new equilibrium price for apples would be P2 and much lower than the
original price P1 so as to ensure that apples stay competitive when compared to pears.
Additionally, since some of the consumers would shift to pears, hence the overall demand for
applies would also see a decline from Q1 to Q2. Considering that apples and pears are
substitutes, hence increased supply of pears would lead to lower price and lower equilibrium
quantity demanded for apples (Mankiw, 2014).
Question 3
a) The objective is to determine if the demand for pears would be elastic or inelastic. In order
to answer the same, the following determinants of price elasticity of demand ought to be
considered (Nicholson and Snyder, 2015).
 Type of good (Necessity vs luxury) – Typically, price elasticity of demand is elastic
for luxury goods as the consumers can defer their purchase even if close substitutes
are not available. This is not the case with necessity which tend to be price inelastic.

Pear is not a necessity in terms of food intake in the Australian context. This implies
that the consumer can very well defer the purchase of this till prices lower down
implying the demand elasticity would be elastic.
 Availability of substitutes – Typically price of elasticity of demand is elastic for those
goods which tend to have a lot of close substitutes and hence in case of higher prices,
the consumers could shift to alternate products thereby lowering the demand
significantly. On the contrary, products which tend to have limited substitutes tend to
have inelastic price elasticity since even if the price is increased, the consumers
cannot readily shift to cheaper substitutes. With regards to pear, there are a host of
substitutes available in the form of other choices of fruits which the consumers may
temporary consume if there is an increase in the price and hence the price elasticity of
demand is expected to be elastic.
 Contribution to budget of consumers – Usually goods which tend to result in
significant proportion of consumer expenses are those that the consumers are most
sensitive to and hence lead to higher price elasticity. On the contrary, goods which
tend to have limited share in the budget are typically those whose price movements do
not have significant impact on the budget of the consumer resulting in relatively
inelastic demand. Pears would fall in the latter category as only a nominal amount is
spent by the families on pears and hence the price elasticity would be relatively
inelastic.
Based on the above discussion, it would be correct to conclude that price elasticity of pears
would be elastic primarily on account of availability of cheaper substitutes besides this not
being a basic necessity.
b) It is apparent from the above discussion that the price elasticity of demand is elastic. As a
result, the percentage change in quantity demanded would be greater than the corresponding
percentage change in price. As a result, when there is an increase in the price, the relative fall
in quantity demanded would be higher, thereby rendering revenue lower. On the contrary
lower prices would result in disproportionate increase in the quantity demanded due to which
there would be an increase in the overall revenue realised (Arnold, 2017).
The graphical illustration of the same is indicated below.

In the above case, there is an increase in the supply leading to shift of the supply curve from
Supply 1 to Supply 2. The demand curve does not change and hence there is a change in the
equilibrium position which leads to price shift from P1 to P2. The corresponding increase in
equilibrium quantity is highlighted by Q2 – Q1. It is apparent that the increase in quantity is
significantly greater than the price decrease because of which the overall revenues would be
higher (Krugman and Wells, 2017).

References
Arnold, A.R. (2017) Microeconomics. 9th edn. Sydney: Cengage Learning, pp. 56-57
Mankiw, G. (2014) Microeconomics. 6th edn. London: Worth Publishers , pp. 67-68
Mankiw, G.N., Mankiw, G.N. and Taylor, P. (2016) Microeconomics. 5th edn. Sydney:
Cengage Learning, ppp. 87-89
Nicholson, W. and Snyder, C. (2015) Fundamentals of Microeconomics. 11th edn. New York:
Cengage Learning, pp. 112-114
Krugman, P. and Wells, R. (2017) Microeconomics. 2nd edn. London: Worth Publishers, pp.
56-60
Pindyck, R. and Rubinfeld, D. (2015) Microeconomics. 5th edn. London: Prentice-Hall
Publications, pp. 54-55