Question1:

As we assume that strawberries are sold in Perfect Competition, it means that market cannot set
their own prices, cannot influence the market price of their product and market share has no
influence on prices [CITATION LOU01 \l 1033 ]

In perfect competition the demand curve will be down sloping means that price of the
Strawberries are increasing and demand for the Strawberries are decreasing. The price of the
strawberries can be determined by the interaction of demand curve and supply curve. (Parkin and
Bade 2016, p.34).

In Perfect competition market:

 All producers are price takers means that they cannot influence and set the price of the
product in the market. If one supplier tries to increase the price, the consumer will shift
towards the competition offering less price.
 Products are homogeneous. The products cannot be varied in perfect completion
situation.

The determinants of Demand are:

 Taste: It will increase the demand if favorable changes are being made and it will
decrease the demand if favorable changes are not being made.
 Demand also depend on population factor. Higher population, higher demand, Lesser
population, lesser demand
 Income: If the consumers have high income, it will increase the demand accordingly and
if consumers have low income, the demand will not be as higher.
 Price of related goods
-Substitute Goods: These are the goods which can be used in the place of each other.
This implies the demand and price of the substitute good are directly related.
-Complimentary Goods: These are the goods that can be used together. When goods are
compliment, they produce inverse relation between price of one good and demand for
another good.
The Determinants of Supply are:

 Resource Pricing: It refers to the pricing of factor of productions. A rise in resource

price i.e. labor, material or capital can increase the price of good which cause decrease in
supply of particular goods. A decrease in the price of resources will increase the supply
of particular goods and move the supply curve towards right.
 Technology Factor: If there is a technological improvement then goods will be produced
more efficiently means less price on resources and this factor will increase the supply of
goods due to low price.
 Prices of other related goods: On the off chance that the price of a substitute goods rise,
producers can shift creation towards the higher priced great causing a decline in supply of
the original product. On the off chance that a crude material has a side-effect, an
expansion in supply of one great suggests a comparing increment in supply of the side-
effect.
 Number of suppliers: Large number of suppliers will create large number of supplies in
market and vice versa.
 Weather Conditions: Good weather conditions will increase supply and bad weather
conditions will be in result decrease in supply.

Diagram 1:

Market Supply

Price

P1

Market Demand

Units or Output
The supply curve will not shift as other producers of strawberries contributing insignificantly in
the market.

This is case A for perfect companion in the market where are things remain constant. The other
case in which Strawberries are contaminated, the Demand curve will move downwards to P2 and
Q2 respectively. The supply curve will not change though and will remain constant because of
ceteris paribus compulsion applied. If it is assumed in the long run, Supply curve can be shifted
according to the given circumstances.

Diagram 2

Market Supply
Price

P1
P2
Market Demand
D2 D1
Q2 Q1 Units or Output

As we can see from Diagram 2, after contamination, demand of strawberries are decreased and
the demand curve shifts from D1 to D2 which results decrease in price and quantity demanded.
Supply have no effect in the perfect competition as it is not in the long run.
Question 2:

Blueberries can be a substitute for strawberries. In this situation the chances of consumers
shifting towards substitute will be higher as strawberries are contaminated and it will have a
direct impact on strawberry market. If the strawberries are not contaminated then demand and
supply curve will be at equilibrium point and substitute cannot be occurred.

As the demand of strawberries decreased, the demand for blueberries are increased. As we have
not discussed the supply curve, supply for both commodities will be considered as constant and
we are also considering that Blueberries are also sold in perfect competition market.

S1

P2
P1

D2

D1

Quantity
Q1 Q2

This diagram shows the Blue berries in perfect competition market when strawberries are
contaminated. Before the shift of consumers towards blueberries, the demand for Blue berries are
D1, and the quantity demanded with effect of supply curve is Q1. After the shift of consumers
towards blue berries, the demand of Blueberries are increased result in moving the demand curve
upwards and this also cause increase the price of blueberries with supply remain constant of
blueberries. The new curves which are shown in above diagram for blueberries new Demand,
Quantity and price are i.e. D3, P2 and Q2.
Question 3:

a) The price elasticity of demand are depend on these factors mainly:

1- Substitutes
If there are any substitutes to the product then it will be price elastic. If there are no close
substitute of that product then price will be considered in elastic.
2- The period of time under consideration.
Price elasticity of demand is high if time under consideration is short. This is because
people need time to adjust according to changes in prices. Thus, for longer time duration,
people adjust themselves according to change in price. And hence price elasticity of
demand will be low for long time duration and vice versa (Lee, 2013).
3- Budget or income of consumer
It should also be taken into consideration about the income level of the consumer. If
consumer Income level is higher than he can afford the substitute, and if the consumer
income is lower than he cannot afford the substitute and price will be become in elastic.

In this case the price of strawberries are elastic as there is substitute available in the shape of
blueberries. The price of blueberries are also not high that it will make strawberries price
inelastic.

People will take less time in consideration and will shift swiftly towards blueberries as there is
no technical philosophy behind this.

As strawberry is a fruit and people eat it to give treat to their taste buds and also for improving
their health as strawberries contains vitamins which are necessary for the body. Blueberries can
also bring those benefits to consumer health and have a very good taste and also not
contaminated compared to the strawberries. So it will make strawberries price effective as people
will shift towards the substitute.
b) As we have determined the price elasticity factors above, it shows that the Strawberries
are price effective and due to contamination of Strawberries, the revenue of farmers will
be effected. As the consumer will shift towards the blueberries, the demand of
strawberries will be decreased and farmers will earn less revenue in market. The
following figure will help in understand how revenue will be effected.
- Suppose Before contamination of strawberries, the demand is 150 and price is $5 set by
the market equilibrium.
- After contamination, the demand of the strawberries decreased to 80 and new price set by
the market equilibrium is 3.
Diagram 4:

Price
Revenue before contamination =
A P*Q= (150*5)= $750
5

750 Revenue before contamination =

3 B P*Q= (80*3) = $240

240

Quantity
150 80

References
Makowski, L. & Ostroy, J. M., 2001. Perfect Competition and the Creativity of the Market. Journal of
Economic Literature, pp. 479-535.

Parkin and Bade 2016, Microeconomics: Australia in the Global environment, 1st edition,
pearson, Australia.
Lee, E. and Lee, B., 2013. Dynamics of price elasticity over time: Evidence from the e-book industry.
Dynamics, no. 6, pp.18-2013.