Question

Assuming you still have your job at the bakery, you have found that suddenly the market allows you to charge a much higher price for your cakes than what your total costs are to produce the cakes (all costs including all explicit and implicit costs).  What do you perceive might happen in this market for cakes, why?  Do you perceive there is a market that exists right now in which appears “overly” profitable for those in that market?

Answer 1

If the price has changed then demand for cake will also change. Moreover, demand depends on taste and preference and income of the consumer. Since the price has increased then demand will fall, by the law of demand that is demand is inversely related to price. The market will be flooded with cakes because of low total cost, as a result, there will be an excess supply of cakes in the market. And the owner of the bakery shop will earn a supernormal profit if they sell cake at a price higher than total cost.