The Supply and Demand Model - Buyers and Sellers

A) The supply and demand model is a very useful model in certain industries. Start your essay with a description of the model and the three underlying assumptions. Discuss why these assumptions are important and how the predictions of the model depend on these assumptions.

A) A market is a group of buyers and sellers of a particular good or service.

The buyers and sellers as a group determine the demand and the supply of the product.

A competitive market is a market in which there are many buyers and many sellers so that each has a negligible impact on the market price. In addition to this, there are homogeneous products of known quality (all the same) and there is perfect information about price for both parties.

Buyers and sellers are price takers of a particular good or service which they know the price and no single buyer or seller can influence the market price of the good as individuals they can only supply or buy a small amount.

Demand is the quantity that buyers want to purchase at a given price (Ceteris Paribus) and its curve slopes downward.

Supply is the quantity that sellers want to supply at a given price all else constant and its curve slopes upward.

Intersection of the supply and demand curves determines the market equilibrium. Price will be stable when there is as much for sales as buyers want to buy.

Revenue of a competitive industry it is proportional to the amount of output it produces.

In the short run a competitive firm produces and amount such that price equals marginal cost and ignores sunk cost .If the company can't recover its fixed cost will choose to shut down temporary.

Changes in marginal cost of an industry shifts the supply curve and affect equilibrium price and quantity.

In the long run we have to consider all costs and shut down if we lose money.