Price And Quantity Determination Under Perfect Competition - SS2 Economics Lesson Note
Under perfect competition, the market is characterized by a large number of buyers and sellers who are price takers, meaning they have no control over the price of the good or service being traded. In other words, the price is determined solely by the forces of supply and demand. The point at which the supply and demand curves intersect is called the equilibrium price and quantity.
At the equilibrium price, the quantity demanded by consumers equals the quantity supplied by producers. Any deviation from the equilibrium price will result in a surplus or shortage of the good or service, leading to market forces pushing the price back towards equilibrium.
The price of a good or service decreases when there is a surplus in the market, and increases when there is a shortage. The market determines the price and quantity of a good or service, and no individual buyer or seller can influence the market price.
In perfect competition, producers have no market power and must accept the market price as given. They produce and sell the quantity that maximizes their profits at the given market price, which is where their marginal cost equals the market price. Producers in perfect competition produce and sell the quantity that maximizes their profits at the point where their marginal cost equals the market price.
Word problems on determination of equilibrium price and quantity under perfect competition
Example 1:
A small business owner sells hamburgers in a perfect competitive market. The demand curve for hamburgers given by Qd = 80 - 4P and a supply curve given by Qs = 10P + 20. What is the equilibrium price and quantity of hamburgers in this market?
Solution:
Equilibrium occurs when Qd = Qs. Setting the demand equal to the supply and solving for P:
80 - 4P = 10P + 20
60 = 14P
P = 4.29
Substituting P into either the demand or supply equation gives:
Q = Qd = 80 - 4(4.29) = 63.84
Therefore, the equilibrium price and quantity of hamburgers in this market are $4.29 and 63.84 units, respectively.
Example 2:
Joan runs a coffee firm. The demand curve for her products is given by Qd = 200 - 5P and the supply curve given by Qs = 40P - 60. What is the equilibrium price and quantity of coffee that will yield profit in Joan's business?
Solution:
Equilibrium occurs when Qd = Qs. Setting the demand equal to the supply and solving for P:
200 - 5P = 40P - 60
260 = 45P
P = 5.78
Substituting P into either the demand or supply equation gives:
Q = Qd = 200 - 5(5.78) = 167.1
Therefore, the equilibrium price and quantity of coffee that will yield profit in Joan's business in this market are $5.78 and 167.1 units, respectively.