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Economics - Essay Example

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The market model of supply-demand determines the price and quantity of a commodity, pertaining to the specific behavior of two market agents: The consumer and the producer. Consumers purchase according to their willingness and ability to buy a commodity, and the producer owns…
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Download file to see previous pages... At this specific combination of price and quantity, both the agents are maximizing their self interests, keeping in mind the other agent’s behavior and satisfying the condition of Pareto-Optimality (Google Docs, page 57-58).
A competitive market is identified by three main characteristics: many consumers and many sellers, freedom of choice under the umbrella of perfect information, and the assumption that the agents have a rational behavior in determining their choice, which essentially maximizes their self-interests. To ensure optimality of outcome, the existence of externalities is unacceptable (Howard, 1994, page 384)
The market model of a competitive market is thus based on the general assumption that industries seek to maximize their profits, and therefore are competitive. However, given the condition that a single firm is just one part of the many firms in the market, it is projected that it cannot affect the price of the commodity which in this case is ‘the rainwater tanks’. Hence an individual seller is just a price taker, it can be rightly said that it faces a flat demand curve (John and Akila, 2009, page 246)
Referring to the diagram (perfect competition) below, the Supply Curve (Ms) interacts with the Demand Curve (Md) in the Industry model, to determine the equilibrium price which is P1, that will become the demand curve of an individual firm i.e. the flat line AR=MC in the Individual Firm model. The quantity supplied by the individual firm is Q1, and the quantity supplied by the overall industry would be the amount on the x-axis (Industry Output), corresponding to P1.
The shaded area denoting the profit of any individual firm is an assumption based on the consideration that the supplier has an average cost below the price; However, depending upon every individual firm’s own capacity to supply rainwater tanks and the respective average costs they face, they shall determine their supply curve, and all the individual ...Download file to see next pagesRead More
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