Perfect Competition Test - 3

A firm under perfect competition is Price taker. In perfect market conditions (also called perfect competition) a firm is a price taker because other firms can enter the market easily and produce a product that is indistinguishable from every other firm's product. This makes it impossible for any firm to set its own prices.

A decrease in consumer income for a normal good leads to a decrease in demand, causing the equilibrium price and quantity to decrease as the lower demand reduces both price and quantity traded in the market.

When a price floor is set above the equilibrium price, it leads to excess supply and a reduction in producer surplus. Some producers are unable to sell the quantity they desire at the higher price, resulting in a loss of producer surplus.

A price floor above the equilibrium price creates a situation where the quantity supplied exceeds the quantity demanded, leading to excess supply or a surplus in the market.

When a price ceiling is set below the equilibrium price, it leads to excess demand and a reduction in consumer surplus. Some consumers are unable to purchase the quantity they desire at a lower price, resulting in a loss of consumer surplus.

The equilibrium price is the only price where the plans of consumers and the plans of producers agree that is, where the amount consumers want to buy of the product, quantity demanded, is equal to the amount producers want to sell, quantity supplied. This common quantity is called the equilibrium quantity.

The situation where the quantity demanded is more than the quantity supplied at the prevailing market price is known as a "shortage" or "excess demand." In this scenario, consumers are willing to buy more of a good or service than producers are willing to supply at the current price, resulting in a shortage of the product in the market.

When both demand and supply increase, the equilibrium price decreases as the increase in supply puts downward pressure on prices. However, the equilibrium quantity increases as both the higher demand and supply lead to an increase in the quantity traded.

The price mechanism, also known as the market mechanism, is a fundamental concept in economics. It refers to the way in which the decisions made by consumers and producers in a market are coordinated through the interactions of supply and demand, ultimately leading to the establishment of equilibrium prices.

The situation where the quantity supplied is more than the quantity demanded at the prevailing market price is known as a "surplus" or "excess supply." In this scenario, producers are willing to supply more of a good or service than consumers are willing to buy at the current price, resulting in a surplus of the product in the market.