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- Describe how a firm in perfect competition makes profit-maximizing decisions
- Describe how
perfectly competitive markets determine output, price, and economic profit in the short run - Explain how output, price, and profit are determined in perfectly competitive markets in the long run
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- We expect that firms in perfectly competitive markets can earn higher economic profits in the short run but will only earn normal profit in the long run. Why do we expect perfectly competitive firms to be unable to earn high economic profit in the long run? The inability of perfectly competitive firms to earn high economic profit in the long run is dependent on there being low barriers to entry in perfectly competitive markets. Explain why this is the case. Why do firms remain in business if they cannot earn economic profit?Suppose that firm is in a breaking even status in a perfectly competitive market. Using graphs (for both industry and firm) to explain how a decline in demand in the short run affects some firms’ performance (e.g., earn profits or experience loss). In the long run, how this results in exit of some firms from the same perfectly competitive market. Comment on the market equilibrium quantity and price in the long run?Explain how a firm in a competitive market identifies the profit-maximizing level of production. When should the firm raise production, and when should the firm lower production?
- Explain in detail how purely competitive markets, in the long-run, know how to adjust to and provide the correct output, at the correct price. Give an example of a good or service you might buy that is closest to being in a purely competitive market. Explain your logic.Perfectly competitive industries have free entry and exit in the long run. When will firms decide to enter an industry? How does free entry and exit affect a perfectly competitive firm’s profit in the long run?Suppose the shirts industry is perfectly competitive and begins in a long-run equilibrium. (a) Pluto Company invents a new production process that reduces the production cost. What happens to Pluto Company’s profits and the price of shirts in the short run when Pluto Company’s patent prevents other firms from using the new technology? (b) What happens in the long run when the patent expires and other firms are free to use the technology?
- you've been learning about what makes a market perfectly competitive, how a firm in a perfectly competitive market makes profit-maximizing decisions, and how a perfectly competitive market moves towards equilibirium. But how applicable is this to real life? For this discussion, try to think of a market (for a product or service) that is perfectly competitive or very close to it. What characteristics of the market make it like perfect competition? Are there factors that keep it from being perfectly competitive? If so, what are they? How close do you think the firms in this market are to perfectly competitive firms in choosing equilibrium price and quantity?What is the most important decision a perfectly competitive firm must make in order to maximize profit? what quantity to produce what price to charge what quality to produce what quantity of labor is neededDiscuss the situation facing firms in competitive markets. Why is it said that they are "price takers" and unable to influence the market price? If firms in competitive markets cannot effectively choose the price of their output, what do they decide? What determines the level of output that they produce? Next, think of or research some examples of firms that might decide to shut down in the short run. What do you think would make them choose this course of action? Discuss the industry and firms in it, along with the conditions prompting the potential shutdowns. Could seasonality in demand be a potential factor? Explain. What is the exact price for the product that is referred to as the “shut down” point in the short run? When would a seller possibly decide to exit the industry over the long run? What should product price be compared to when assessing whether there is a profit or loss? Can you think of any examples of declining industries? Explain.
- If firms in a competitive industry incur an economic profit, what happens to supply, price, output, and economic profit in the long run? ExplainHow does a market compete with other firms efficiently to maintain profit in a competitive market over time? Show diagram with shifts in price, cost, quantity, etc.Draw a graph of a typical firm and an industry market (with supply and demand). Illustrate and explain what happens in the market if at the initial price, the typical firm is earning an economic profit. Show and explain how the two graphs will adjust toward market equilibrium.
