ASSIGN 1- Explain what conditions are necessary for a market to be perfectly competitive. How does a firm operating in a perfectly copetitive marketset its price and output? What happens in such a market if firms are able to achieve high level of profitabilty.
Necessary conditions for perfect competition are –
1. Large number of buyers and sellers of a commodity:
The number of buyers is so large that the demand by an individual buyer remains only a small fragment of the market demand for a commodity. Likewise, the number of sellers is so large that the supply of an individual seller (Firm) remains only a small fragment of the market supply. 2. Homogeneous Product:
Under perfect competition, each firm sells an homogeneous …show more content…
Perfect knowledge:
Buyers and sellers are fully aware of the prevailing price in the market. They are also aware of the fact that homogeneous product is being sold in the market.
4. Freedom of Entry and Exit:
A firm can enter or leave the industry any time. Is too short for an existing firm to leave the industry or for a new firm to join the industry .Entry or exit is possible only in the long period.
5. Independent Decision-making:
There is no agreement between different firms regarding quantity to be produced or price to be charged. In other words, firms do not form 'trusts ' or cartels.
Perfect competition facilitates optimum level of output and lowest level of price.
6. Perfect mobility:
Factory of production are perfectly mobile. They will move to that industry where they get best price. Accordingly, uniform factor price prevails in the market.
7. No Extra transport cost:
For one price to prevail throughout the market, it is essential that there is no extra transport cost for the consumers while buying a commodity while buying commodity …show more content…
We can express this mathematically by stating:
p = TR - TC
The term on the left represents the change in revenue from producing one more unit, which is called marginal revenue. The term on the right represents the change in total costs resulting from producing one more unit, which is marginal cost.
The firm 's profit will be maximized at the level of output whereby the marginal (additional) revenue received from the last unit produced is just equal to the marginal (additional) cost incurred by producing that last unit. Maximum profit for the firm occurs at the output level where MR = MC.
For a firm operating in a competitive environment, the marginal revenue received is always equal to the market price. Therefore a firm operating under perfect competition will always produce at the level of output where the marginal cost of the last unit produced is just equal to the market price.
Average cost is below the price the firm obtains for each unit sold. Quantity is purposely limited so as to produce enough “scarcity” to ensure a high “monopoly Price” that is well above the “competitive
Necessary conditions for perfect competition are –
1. Large number of buyers and sellers of a commodity:
The number of buyers is so large that the demand by an individual buyer remains only a small fragment of the market demand for a commodity. Likewise, the number of sellers is so large that the supply of an individual seller (Firm) remains only a small fragment of the market supply. 2. Homogeneous Product:
Under perfect competition, each firm sells an homogeneous …show more content…
Perfect knowledge:
Buyers and sellers are fully aware of the prevailing price in the market. They are also aware of the fact that homogeneous product is being sold in the market.
4. Freedom of Entry and Exit:
A firm can enter or leave the industry any time. Is too short for an existing firm to leave the industry or for a new firm to join the industry .Entry or exit is possible only in the long period.
5. Independent Decision-making:
There is no agreement between different firms regarding quantity to be produced or price to be charged. In other words, firms do not form 'trusts ' or cartels.
Perfect competition facilitates optimum level of output and lowest level of price.
6. Perfect mobility:
Factory of production are perfectly mobile. They will move to that industry where they get best price. Accordingly, uniform factor price prevails in the market.
7. No Extra transport cost:
For one price to prevail throughout the market, it is essential that there is no extra transport cost for the consumers while buying a commodity while buying commodity …show more content…
We can express this mathematically by stating:
p = TR - TC
The term on the left represents the change in revenue from producing one more unit, which is called marginal revenue. The term on the right represents the change in total costs resulting from producing one more unit, which is marginal cost.
The firm 's profit will be maximized at the level of output whereby the marginal (additional) revenue received from the last unit produced is just equal to the marginal (additional) cost incurred by producing that last unit. Maximum profit for the firm occurs at the output level where MR = MC.
For a firm operating in a competitive environment, the marginal revenue received is always equal to the market price. Therefore a firm operating under perfect competition will always produce at the level of output where the marginal cost of the last unit produced is just equal to the market price.
Average cost is below the price the firm obtains for each unit sold. Quantity is purposely limited so as to produce enough “scarcity” to ensure a high “monopoly Price” that is well above the “competitive