In perfectly competitive market, the government does not interfere in any way, and it is assumed that the parties in the market have correct information meaning that none of them can benefit by giving false information (Hall, 98). The price in this market is arrived when the quantity demanded is equal to the quantity that is supplied such that the price the consumers are prepared to offer is the same price that the sellers are willing to accept (Hall, 71).
Looking at the demand curve, it appears horizontal. The reason for this is that a small change in price can lead to infinite change in the quantity demanded. It simply means that the price cannot be adjusted by the sellers to gain from the high price (Dodd, 216). This is because the customers will easily shift to the other sellers who sell the same products.
The price of the competitive market is very high. This is what measures how the price of the products in the market responds to change in the price of the same products. The fact that the elasticity is very high means that a small change in price changes the quantity that the sellers can sell in the market. This is because perfect substitutes in the market are so many such that when one seller increases the price of products, the customers shift to the alternative substitutes (Dodd, 210).
The perfectly competitive firm in the valley is a bakery that will engage in the manufacture of cakes.
The firm will operate in a competitive market because of several reasons. First, there are several other firms that produce the same products in the region such that the firms do not also incur transport costs. This means that there are many alternative products in the region that will compete with the new firm. There will be no hindrance to entering the market and at the same time, leaving the market will not be a problem (Hall, 112). However, entry of the firm in the region will not affect the current market situation considering that some customers will prefer the cakes from the new firm while others will still prefer products from the already existing firms. The price of the cakes from the firm will be close to the price of other similar cakes in the current market. This ensures the customers do not shift to other alternative products in the market.
The market supply curve of the firm will shift to the left showing that the supply for the products has declined.
This is in case the major resource becomes extremely scarce. If the resource is not availed in enough quantities, then it would mean that the output in the market will have to reduce in accordance to the available resource. This decline in output will result to a decline in the supply of products from the firm.
The equilibrium price of the products from the firm will increase. The decline in supply means that some individuals are ready to offer higher prices to buy the product. The price of the raw material that is scarce is likely to increase, and the result of this is a higher price for the same. The high price of raw materials means higher price for final products (Tisdell, 91).
The high price for the products from the firm means that customers will shift to substitutes in the market. The demand will have reduced, and this will mean that the equilibrium quantity will have to reduce. At the same time, the reduced supply will facilitate the lower equilibrium quantity. Finally, the firm will have to leave the market because being in the market will not be profitable.