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