In summary, the ingredients in the competitive model are:
1. rational, self-interested consumers
2. rational, profit maximising firms
3. competitive markets with price-taking behaviour.
Explain each element of this summary. What problem(s) is (are) the competitive model designed to solve? Briefly outline other models that could solve the same problems.
In the basic competitive model, it has been noticed that there are two main participants namely the customers and the producers. Furthermore, there are also a large number of sellers and buyers present in the competitive market who tend to compete among themselves (Fleisher and Bensoussan, 2015).
The rational, self-interested customers are the individuals who are mainly concerned about maximizing their own utility or tend to reduce their costs/risks in the marketplace, for instance, an individual/consumer only purchases the product only that will make them happy so in this sense, they are quite self-interested and rational in nature.
The rational, profit-maximizing firms are the organizations that tend to only concentrate on making profits no matter what and it mainly comes under the rationality theory of a firm.
The competitive markets with regards to the price taking behavior are the markets who generally take price as it is given and a price-taking firm also tends to assume that they can sell whatever quantity it wishes with regards to the market price without harming the price. The competitive model intends to solve the economic problem.
Economics textbooks often cite vegetable markets as examples of perfect competition. What assumptions underlie perfect competition? Do you think vegetable markets meet these assumptions? Justify your answer.
It has been greatly observed that most of the economics textbooks tend to cite the example of a vegetable market as a prominent example of the perfect competition. The main assumptions of the perfect competition are as follows: There are a large number of sellers and buyers, the products are also assumed to be quite homogeneous in nature, there is also no scope of discrimination, there also should be perfect mobility, free exit and entry of the firms are also assumed, and also there are no selling costs under the perfect competition. Yes, the vegetable market meets the assumption of the perfect competition because homogeneous products are produced by a large number of sellers for the buyers (Mas-Colell, 2014).
We are all familiar with the queues that clog the entrances of large department stores when Boxing Day Sales occur every year. What do these lines tell us about the Law of Demand? In your answer comment about the ‘ceteris paribus’ conditions that may or may not exist as the sale doors are opened to the public.
It has been observed that there long queue that is at the entrance of the large departmental stores when the sales of the Boxing Day takes place at every year. Throwing light on the above-mentioned statement it can be said that these lines definitely speaks about the law of demand because it has been noticed that in the primary supply-and-demand models if there is a slight increase in the demand the price of the equilibrium tend to rise i.e.; The ceteris paribus- that simply means that all of the things are assumed to be balanced (F. Bustinza and et al, 2013). The demand tends to be quite high as the Boxing Day is regarded as one of the biggest events with regards to shopping in the entire year. The low prices offered by the departmental stores in the Boxing Day makes the consumers have a price elastic demand and the customers also tend to have the longer-time-horizon.
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“I find the Law of Supply really confusing. My textbook says that the supply curve shows that as the supply increases along the supply curve so the price of the product is higher. On the other hand there are lots of examples in the real world which show the opposite. For instance when the supply of mangoes goes up, the price of mangoes goes down, not up. We can find lots of similar examples, so what is going on?”
Analyse this anecdote to illustrate the importance of using the correct terminology when considering the concepts of demand and supply and their role in the setting of prices in a competitive market.
It has been witnessed that there are a lot of examples given in the real world as well as in the textbook for describing the Law of Supply but most of the illustrations seems to be quite confusing but in this section it will be discussed in a correct manner so that this matter does not remain confusing at all. It has been judged thoroughly that the price is highly dependent upon the characteristics of the two primary components of the market namely the supply and the demand. The determination of the price completely depends on the supply as well as demand in an equal manner. The Law of Supply suggests that if there is an increased price with regards to the goods or services then it results in an increase in the quantity supplied (Ruttan and Thirtle, 2014). In other words, it can be also said that there is a direct relationship between the quantity and the price, the quantities tend to acknowledge in the same direction as the changes in the prices take place.
Explain, how the laws of supply and demand help us understand the way share prices change on a daily basis. In your answer, pay some attention to the sorts of non-price determinants of the demand and supply of shares that help us understand daily price fluctuations. Why does some shock to the market, such as a poor profits report, result in a new but lower share price?
The law of demand and supply is an important economic theory that mainly explains how the demand and supply are closely related to each other and how this particular relationship affects the price of services and goods. It's a basic principle that states that when there is an oversupply of service and goods takes place then the price generally tends to fall at an alarming rate and vice versa. The non-price determinants of the supply and demand will alter the supply and demand for the service and goods, but it is applicable within the price range that is acceptable (Rios, McConnell and Brue, 2013). If the non-price determinants tend to drive the increase in demand but the price tends to be quite high and the buyers will look out for the products that can be substituted in this particular situation. In case of the stock market, it can be said that the earnings play a vital role for determination of the stock's price and they are also the factors that are directly responsible for changing the price of stock quite quickly. The price of the stock may be lower or higher but is likely to go away after a certain period of time.
F. Bustinza, O., C. Parry, G., and Vendrell-Herrero, F. (2013). Supply and demand chain management: The effect of adding services to product offerings. Supply Chain Management: An International Journal, 18(6), 618-629.
Fleisher, C. S., and Bensoussan, B. E. (2015). Business and competitive analysis: effective application of new and classic methods. New York: FT Press.
Mas-Colell, A. (Ed.). (2014). Noncooperative approaches to the theory of perfect competition (Vol. 3). New Jersey: Academic Press.
Rios, M. C., McConnell, C. R., and Brue, S. L. (2013). Economics: Principles, problems, and policies. New York: McGraw-Hill.
Ruttan, V., and Thirtle, C. (2014). The role of demand and supply in the generation and diffusion of technical change(Vol. 21). New York: Routledge.