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.
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
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:
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).
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.