Canadian CANNAINVESTOR Magazine October 2017 - Page 123

What if the price was set at P1 and not at EP? On the left side, the point where the P1 blue line intersects the gray vertical “supply” line is the maximum quantity that can be produced due to various capacity constraints. At that price we can see the demand for the product which exceeds the supply. The area between is the “shortage”. The supply curve will shift to the left to depict that maximum quantity that producers are able to supply “P1” (S2 on the right side graph). However, that reduced supply level naturally demands a higher price because the point of the exercise is at what price does supply satisfy demand. If all five criteria for perfect competition were met one can repeat this process (higher price results in producers willing to supply more and increased supply demands a lower price – and eventually the price and supply should rest on the original perfect competition model. But we know that is not the case because supply is fixed in the short run and there are barriers to entry at both the Federal and Provincial level.

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