Answer to Question #124444 in Microeconomics for Tigist

Question

Explain the main reasons why a competitive
equilibrium may fail to exist.

Answer 1

Competitive equilibrium is a condition in which profit maximizing producers and utility maximizing consumers in competitive market environment with freely determined prices arrive at an equilibrium price. At this equilibrium price, the quantity of goods supplied is equal to the quantity demanded. This results to all parties buyers and sellers are satisfied that they're getting a fair deal. Reasons that may make competitive equilibrium to fail are;

1. Higher supply and low demand. when their is oversupply of goods into the market and the quantity demanded is low then the competitive equilibrium fail to exist. this is because there is no equal supply and demand of goods.
2. Government policies. Government policies may make competitive equilibrium to fail because when the government increases the taxes the price of goods go up and the quantity demanded falls but the quantity supplied rises.