Essay Sample on Demand, Supply and Elasticity

Introduction

In a perfectly competitive market, the competition is considered to be at its greatest possible level. As a result, it I surged that firms operating in a perfectly competitive market tend produces the best possible outcomes for its consumers and society. Based on the scenario of the bumper pears harvest predicted at Goulburn Valley orchard, the producers of pears are considering the choice of increasing the number of contractors to help them meet the target. The average number of pears harvested in the previous years is 1500; however, they predict to increase the harvest by 300 to 400 bins for the coming year.

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The impact on the perfectly competitive market requires the Goulburn Valley orchard to accept the equilibrium price at which the pears will be sold. In this case, the firm is considered to be the sole price taker. If Goulburn Valley orchard decides to alter the amount of the prices for pears in the market, there will be no sales. Therefore, for the producers to gain more customers, the price for pears should not be increased more than the initial market price. The prevailing pressure of competing producers force Goulburn Valley orchard to accept the existing equilibrium price in the market based on the nature of a purely competitive market. Generally, as the prices for the pears goes up, ceteris paribus and quantity demanded will eventually decrease (Bas, M. Mayer, T. & Thoenig, M. 2017, 15). This indicates the negative relationship between the price and quantity of pears demanded. Therefore, Goulburn Valley should consider the prevailing prices for the pears and the current demand before increasing the production from 1500 to 2000.

The demand and supply curve for the perfectly competitive market

Quantity

As Vic moves to Australia, there is a change in the demographic market which causes a shift in the market structure. However, it is stated that the Scali family conduct the fruit farming on a 60ha land. This indicates that the family produces more pears as compared to the previous years. The decision by Vic to stay indoors so that he is left with more hours to concentrate on fruit farming is a clear indication that the quantity of production will increase. The surplus pears mean the family engages in massive production and exportation of 80% produce is attributed to the high demand at the Melbourne Wholesale Market. There is an impact of the expectation of a bumper crop in Australia on the current market equilibrium price and output. For instance, the surplus production will contribute to the decline in the prices for the bumper crop. The supply of crops exceeds the demand from the customers; therefore, the market equilibrium price will be shifted to the left to achieve the economic equilibrium. Similarly, the market equilibrium output will be shifted to the left to counter the excessive production as a result of a decrease in the price.

In relation to the effects of ceteris paribus, it is urged that more products tend to be purchased by the consumers when the prices are reduced. Therefore, if the demand for the pears exceeds the product's supply ceteris paribus, then the prices for the pears will go up. The causal change experienced in the production of pears is isolated. The market equilibrium can be achieved if the producers of pears ensure that the prevailing supply equals the current demand for the pears. As a result, the market equilibrium prices and output will be achieved by the producers. If the producers expect an increase in the production of the crop in Australia, then the prices should be adjusted to match the market equilibrium price and output (Quandt, R. 2000, 440).

Price changes for goods affect their demand and supply in the market. For instance, an imperfectly competitive market structure exhibit different effects as compared to a perfectly competitive market. If the family operates under imperfectly competitive market, the production and selling of the pears will be affected. For instance, the change in the prices is determined by the ordinary monopoly and the monopolistic competition. In this case, the monopolistic producer uses the supply to influence prices for the goods. The family can choose to reduce the quantity of pears produced to achieve an increase in the prices. Therefore, the effects of prices changes affect the cross elasticity of demand and supply between the range of products offered on the market. Also, the change in the prices helps in regulating the supply of the products by a single seller. This is considered different compared to the imperfectly competitive market structure.

The possible assumptions, in this case, include the existence of many buyers for the bins of pears produced. It is assumed that own individual actions cannot affect the expected market price of the goods. Another assumption is that product differentiation exists, therefore, the goods produced are not homogenous but instead have close substitutes. Finally, there is freedom to enter and exit the market. Thus, all these factors eventually influence the market equilibrium for prices and output (Makowski, L. & Ostroy, J. 2001, 500).

In any given market, there exist two forms of goods based on price elasticity of demand. Those goods where the buyers are price sensitive are considered elastic while the goods where the consumers are not price sensitive are regarded as inelastic. There are three determinants of price elasticity of demand; they include: the availability of close substitutes, the importance of the products cost in the buyer's budget and the period of time under consideration. Using the approach of availability of close substitutes as a determinant of price elasticity of demand, pears are categorized under inelastic. This is because there are no substitutes for the pears; therefore, the elasticity of demand is low (McConnell, R., Brue, S. & Flynn, S. 2009, 22).

The elasticity demand for the pears is considered inelastic; therefore the changes in the price affect the total revenue. In this case, the increase in the price leads to a rise in total revenue. Price inelasticity is considered beneficial for the businesses. The producers of pears enjoy the greater flexibility in the prices for their goods. As a result, the percentage change in demand contributed by the price inelasticity remains essentially the same. Therefore, the consumers' buying habit remains unchanged regardless of the fluctuations in the prices. The producers achieve profit maximization by raising the prices for the pears, and this eventually contributes to an increase in the total revenue. The producers of the pears can enhance price flexibility and profit maximization through price inelasticity approach, and this helps to increase the total revenue for the family.

References

Bas, M., Mayer, T. and Thoenig, M., 2017. From micro to macro: Demand, supply, and heterogeneity in the trade elasticity. Journal of International Economics, 108, pp.1-19.

McConnell, C.R., Brue, S.L. and Flynn, S.M., 2009. Economics: Principles, problems, and policies. Boston McGraw-Hill/Irwin.

Makowski, L. and Ostroy, J.M., 2001. Perfect Competition and the Creativity of the Market. Journal of Economic Literature, 39(2), pp.479-535.

Quandt, R.E., 2000. Tests of the equilibrium vs. disequilibrium hypotheses. International Economic Review, pp.435-452.