Question

1.Perfectly competitive markets and the real world - Few markets in the real world have the characteristics of a perfectly competitive market . Does that mean the predictions of the model of perfect competition are not very useful in predicting how markets in the real world work? Discuss

2. Market equilibrium - when Market equilibrium occurs , Quantity demanded is equal to quantity supplied , Which mean that both sellers and buyers get what they want . Does a market reach market equilibrium on its own , or necessary to have some sort of regulator to manage the price and ensure there is equilibrium? Explain your answer carefully.
3. Using markets to achieve policy objectives- Do you consider raising the price of cigarettes to be a good way to reduce the amount people smoke? Explain your answer carefully.

Answer 1

1- It is true that no market behave as perfectly competitive but this market is very important to understand theoretically because by this we learn how other market structures like oligopoly, monopoly, monopolistic behave and deviate from the ideal scenario.

2- Market reaches equilibrium on its own.

Consumers and producers react differently to price changes. Higher prices tend to reduce demand while encouraging supply, and lower prices increase demand while discouraging supply. Economic theory suggests that, in a free market there will be a single price which brings demand and supply into balance, called equilibrium price. Both parties require the scarce resource that the other has and hence there is a considerable incentive to engage in an exchange.

3- Yes, raising the price of cigarettes can prevent people to smoke. But I feel reduction will be more among new and young smokers who have not yet become habitual to use. Moreover, continued higher prices will result into cessation among current users, discouraging relapse among former users, preventing initiation among potential users, and reducing consumption among those who continue to use cigarettes.