Read the requirement carefully Essay Example | Topics and Well Written Essays - 1500 words

study the requirement c arfully - Essay ExampleThe difference in the products and the way in which firms compete is excessively discussed. The assumptions that hold for the hone market are also explained and highlighted. A perfectly competitive market is the whiz in which the market forces work without any hindrance. This means that the guide and yield interact to determine the court which is accepted by all the other firms. This market is only a theoretical one establish on assumptions and it tells us that how a markets should respond to the changes in demand and supply. The perfect market is nonexistent in our real world like all the other perfect things but it is important to understand it. This is because the perfect market structure can be used to compare the other markets and their responses to changes in different situations. (Goshit & Mai-Lafia, 2009) Firstly, allow us consider the case of chemical equilibrium in a perfect market. The supply and demand aftermath be come equal at some point and that point result be considered as the equilibrium point of the market. The following drawing shows a perfect market at equilibrium. The forces of supply and demand pile the price at $5. (Goshit & Mai-Lafia, 2009) Now, like all the other markets, the perfect markets also faces demand and supply shocks to which it reacts accordingly. broadly speaking the market responds to changes in demand as the consumer is considered sovereign. Let us now consider the case where the consumer demand gains. This may be callable to any reason but let us suppose that it is due to an increase in the price of a substitute. The market will shift accordingly. The following drawing shows how. (Archambault, 2008) The increase in demand will result in extra demand at the same price. This will create a shortage of the product. The supply will react accordingly and there will be a movement along the supply curve. This will lead to a new equilibrium at a higher price and a high er quantity. This is because the consumers were willing to pay more for the good and consequently the market forces reacted and short attract equilibrium was attained. This increase in demand will also tag on to the consumer and producer surplus which is the area between the two graphs. These two refer to the difference between the come in that the consumer or the producer expects and the price. (Krugman and Wells, 2008, p.71-72) The long run response of the market will be different. The long run equilibrium of a market is when the marginal cost becomes equal to the lowest of average total cost (ATC). This equilibrium will be disturbed by the increase in demand. The firms will now bitch a higher price than their marginal costs and thus their average revenue will put across their average total costs. The firms will be earning an abnormal profit. (Peck, 2006) The following graphs show the disturbance. As a result of the abnormal profit, new firms will enter the industry to make profit for themselves. This will cause the supply to increase. This increased supply will push the prices downwards second to normal with a higher summate of goods traded than before. The long run equilibrium will be attained and the market will return back to normal. (Burnette, 2012) The following graph shows the effect of new firms entering the market. Perfect markets differ from the markets we see daily. There are assumptions that need to be considered. The first one is that there are many sellers in the market, which means that the contestation is intense. Secondly,