Introduction

After you have worked through this section of the learning unit, you should be able to:

  • demonstrate how a change in the market influences the demand curve for a firm

We have now learnt that the perfectly competitive firm is a price taker. So what implications would a change in the market have for the individual firm?

Assume that the income of households increase. How do you think the market for fried chicken would react to this increase in income?

  • The market demand for fried chicken pieces would increase and the equilibrium price would rise.
  • The market supply of fried chicken pieces would decrease and the equilibrium price would rise.
Click to Show Answer

It would increase the demand for fried chicken pieces and the equilibrium price would rise.

If the equilibrium price for fried chicken pieces in the market increases from R4 to R6, at what price would Funky Chicken sell its fried chicken?

  • R4
  • R6
Click to Show Answer

It would sell at the market equilibrium price, which is R6, because Funky Chicken is a price taker.

Graphically, the impact of an increase in the market demand on the individual demand by Funky Chicken can be represented as follows:

In the market for fried chicken pieces, the market demand curve shifts to the right and the equilibrium price increases from R4 to R6. The individual demand for Funky Chicken shifts upwards and it can now sell any quantity at R6.

Activity

Indicate whether the following statements relating to the quantities of Spar Cold-drinks is true or false:

By changing its quantity supplied, Spar Cold-drinks can influence the market equilibrium price of cold drinks.

Incorrect. The statement is false. Spar Cold-drinks is a price taker and is too small to influence the market equilibrium price of cold drinks.

Correct. The statement is false. Spar Cold-drinks is a price taker and is too small to influence the market equilibrium price of cold drinks.

Customers are able to purchase cold drinks at the market equilibrium price from any supplier of cold drinks.

Correct. The statement is true. Buyers of cold drinks know what the market price is and they can obtain the product from any of the many suppliers in the market.

Incorrect. The statement is true. Buyers of cold drinks know what the market price is and they can obtain the product from any of the many suppliers in the market.

If Spar Cold-drinks charges a higher price than the price determined by the market, the quantity demanded for the firm’s cold drinks will fall to zero.

Correct. The statement is true. If Spar Cold-drinks sells the product for more than the market equilibrium price, buyers will not buy from the business and the quantity demanded will therefore fall to zero.

Incorrect. The statement is true. If Spar Cold-drinks sells the product for more than the market equilibrium price, buyers will not buy from the business and the quantity demanded will therefore fall to zero.

Spar Cold-drinks can only sell 50 cold drinks at the equilibrium price.

Incorrect. The statement is false. Spar Cold-drinks can sell any quantity at the market price.

Correct. The statement is false. Spar Cold-drinks can sell any quantity at the market price.

Selling cold drinks at a price lower than the market equilibrium price would not be beneficial for Spar Cold-drinks since the business can sell any quantity at the equilibrium price.

Correct. The statement is true. Spar Cold-drinks can sell any quantity at the market equilibrium price and has no incentive to sell it at a lower price.

Incorrect. The statement is true. Spar Cold-drinks can sell any quantity at the market equilibrium price and has no incentive to sell it at a lower price.

Use the diagram to complete the following paragraph by choosing the correct option in brackets:

An increase in the number of suppliers will cause a (rightward; leftward) shift of the (market supply; market demand) curve. This will cause the market equilibrium price to (decrease; increase) and the individual demand curve facing the firm will shift (upwards; downwards).

Click to Show Answer

An increase in the number suppliers will cause a rightward shift of the market supply curve. This will cause the market equilibrium price to decrease and the individual demand curve facing the firm will shift downwards.