Definition of Market Equilibrium: Market equilibrium is a state where the quantity demanded and the quantity supplied of a good or service are equal. At this point, the market price is stable and there is no tendency for the price to change.

Establishment in Perfect Competition: In a perfectly competitive market, equilibrium is established through the interaction of supply and demand. Individual firms are price takers, meaning they must accept the prevailing market price. Consumers aim to maximize utility by purchasing at the lowest possible price.

Conditions for Equilibrium:

• Demand Curve: The demand curve must be downward sloping, reflecting the law of demand.
• Supply Curve: The supply curve must be upward sloping, reflecting the law of supply.
• Equilibrium Price and Quantity: The point where the supply and demand curves intersect determines the equilibrium price and quantity. At this price, the quantity demanded equals the quantity supplied.
• No Surplus or Shortage: At equilibrium, there is neither a surplus (excess supply) nor a shortage (excess demand).

The market for coffee and coffee machines demonstrates a clear relationship of joint demand, specifically as complements. Coffee machines are necessary to consume coffee at home, therefore the demand for coffee is directly linked to the demand for coffee machines. An increase in the price of coffee machines will lead to a decrease in the demand for coffee, as consumers may postpone purchases or opt for cheaper alternatives. Conversely, a decrease in the price of coffee machines will lead to an increase in the demand for coffee.

Several factors influence the strength of this relationship:

• Income Levels: Higher income levels generally mean consumers are more likely to purchase coffee machines, strengthening the joint demand.
• Lifestyle Trends: A growing trend towards home coffee consumption will strengthen the relationship.
• Availability of Alternatives: If readily available and affordable alternatives to coffee (e.g., tea, energy drinks) exist, the joint demand might be weaker.
• Technological Advancements: The introduction of new, more efficient coffee machine technologies could influence demand.

Diagram:

This diagram illustrates the inverse relationship between the price of coffee machines and the quantity of coffee demanded. The demand curve for coffee is shifted to the left (or right) depending on the price of coffee machines.

Factors contributing to inelasticity in the short run:

• Necessity: Petrol is often considered a necessity for commuting to work, school, and other essential activities. Consumers have limited alternatives in the short run.
• Limited availability of substitutes: While alternatives like public transport, cycling, and carpooling exist, they may not be readily available or convenient for all consumers. The infrastructure for these alternatives may be underdeveloped.
• Short time horizon: Consumers have limited time to adjust their behaviour in response to a change in petrol prices. They may not be able to quickly switch to alternative modes of transport.

Consequences for consumers:

• Consumers face higher transportation costs.
• Reduced disposable income.
• Potential for increased inflation across the economy.

Consequences for the petrol industry:

• Increased revenue per unit sold.
• Potential for increased profitability.
• May lead to reduced demand for petrol, potentially impacting investment in the industry.

Long run elasticity:

In the long run, the elasticity of demand for petrol is likely to increase. This is because consumers have more time to adapt. They may:

• Invest in more fuel-efficient vehicles.
• Relocate closer to work or amenities.
• Utilize public transport more frequently.
• Adopt remote working arrangements.