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Assume a competitive market for hairdressers in equilibrium. Explain how a single hairdresser may increase the...

Assume a competitive market for hairdressers in equilibrium. Explain how a single hairdresser may increase the prices in this market. Illustrate it in a graph

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Expert Solution

Suppose hairdresser market is a competitive market. . It has large number of buyers and sellers. A single firm can not influence the price of product. The product sold by a seller can never been distinguished from the product sold by another seller. There is free entry and exit in hairdresser competitive market. So hairdresser firm will earn only normal profit in long run. Price of hairdressing is determined by the market demand and market supply of hairdressing when they are equal. The determined price is taken each hairdresser in market. So each hairdresser is price taker. Hairdresser maximises its profit when its marginal revenue is equal to marginal cost. Demand curve faced by hairdresser is infinitely elastic. Demand curve = average revenue =price is marginal revenue In hairdresser market , price P is determined when market demand curve DD intersects market supply curve SS .P level of price will taken by each hairdresser. They will sell output OQ at OP ( market determined price when MR curve cuts MC curve from below If a single hairdresser may increase the prices in this market , he will lose all of his market share to its competitors. If he increased the prices, all of its customers will simply switch to another seller. When he increased the price toP1 he has to reduce the sale of output to OQ1 due to fall in demand for its products due to higher prices

Rahul Sunny answered 2 years ago
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