Part (A) (1) The conditions of perfect competition are: 1. There must be many firms in the market, and each of them is small in terms of sales comparing to the total market. Thus, firms are price-takers because they cannot affect the market price. 2. All firms in the market produce non-differentiated or homogeneous products. 3. In perfectly competitive market should not be restricted so any firm will be able to enter and exit the market easily without preventing barriers. (2) In the perfectly competitive market, the short-run industry supply is always upward-sloping and the supply prices along the industry supply curve give the marginal costs of production for every firm contributing to industry supply. The short-run supply curve for …show more content…
Here is the explanation for the graph: When market price is more than ATC, that mean the firm makes a profit. When the price is equal to ATC, the firm reach the breakeven where total revenue = total cost. When the price is less than ATC, that means the firm experiences a loss. (4) The goal of the producer in the short-run is profit maximizing or loss minimizing. The profit maximizing or loss minimizing rule for a firm under the conditions of the perfect competition market is simple and intuitively appealing. The output should be set at the level where the difference between total revenue and the total cost of producing that output is the greatest. In other word, marginal costs equal to marginal revenue. Part (B) As known that the firm in the short run has at least fixed factor, and it seeks to maximize profit to minimize loss by adjusting the level of output. The firm should produce when the difference between total revenue and total cost is profitable or the loss is less than the fixed cost. However, it needs to stop producing or even shut down in the short-run when its loss exceeds its fixed costs. By shutting down, the firm’s loss will equal the fixed costs of producing. Part
average price. In long term this will not be the case since the operating costs will
A couple of Squares has a limited capacity for which to produce their products and smaller companies tend to have larger fixed costs than bigger companies. Therefore, A Couple of Squares must maximize profits in order to ensure that they will stay in business. A profit-oriented pricing objective is also useful because of A Couple of Squares’ increased sales goals. A Couple of Squares increased their sales goals due to recent financial troubles. Maximizing profits is the easiest way to meet these sales goals due to the fact that A Couple of Squares has limited production capacity. The last key consideration favors a profit-oriented pricing objective because A Couple of Squares offers a specialty product. A specialty product often has limited competition, therefore can be priced on customer value. Pricing at customer value will maximize profits as well as customer satisfaction. A Couple of Squares’ lack of production capacity, increased sales goals, and specialty product favor a profit-oriented pricing
Others added that monopolies produce less output and charge a higher price than a purely competitive environment. The monopolist sets the marginal revenue equal to marginal cost and output is therefore smaller. In monopolies, profits can persist indefinitely, because high barriers to entry prevent new firms from taking part in the
The ease at which a firm can enter and exit a market will leave it
In market choice consumers carry the power. Consumers demand products through their willingness and ability to purchase products. As a result of their demand, firms supply or produce goods to satisfy consumers. Both supply and demand can be graphed on supply and demand curves with price as the independent variable and quantity as the dependent variable. The demand curve follows a negative slope, so as the quantity demanded increases price decreases. The supply curve follows an opposite, positive curve, as the quantity supplied increases, so does the price. Looking at both on the same axis we can recognize how supply and demand relate. To see the supply and demand curves for a product, we would look at the quantity supplied verses the quantity
Intuitively, a cost-plus approach sets a lower boundary for the selling price. Yet to pitch a competitive price on the market, it takes more than that. The demand forecast advocates opting for the lowest selling price which yields the highest return. A market penetration strategy necessitates thorough knowledge of the selling prices of the nearest competitors and their retaliation potential. Ideally, the lowest price in the market of £10,400 dictates the upper ceiling of AUDI’s price discretion. However, setting initially a too low price in the hope for increasing it subsequently is not a viable option, as prices are somewhat inflexible upward. Instead, costs have to sink in the long run. Nevertheless, claiming a larger market share will allow AUDI to deftly climb the steep learning curve, lower its costs and further mobilize against market followers. A high price elasticity of demand insinuates that profit margins will continue to soar, if selling prices are reduced any further. As the point of maximum profit is apparently not yet reached, the company is advised to extend the range of the forecast. But is the highest profit naturally the best profit?
A perfectly competitive market is based on a model of perfect competition. For a market to fall under this model it must have a number of firms, homogeneous products, and easy exit and entry levels into the market (McTaggart, 1992).
Can you imagine the world with a limited amount of choices when it comes to purchasing different products and services? How does perfect competition and monopolistic competition differ and effect our buying power? As stated by Investopedia (2016), “Perfect competition is the opposite of a monopoly, in which only a single firm supplies a particular good or service, and that firm can charge whatever price it wants because consumers have no alternatives and it is difficult for would-be competitors to enter the marketplace (para 1)”.
There are many industries. Economist group them into four market models: 1) pure competition which involves a very large number of firms producing a standardized producer. New firms may enter very easily. 2) Pure monopoly is a market structure in which one firm is the sole seller a product or service like a local electric company. Entry of additional firms is blocked so that one firm is the industry. 3)Monopolistic competition is characterized by a relatively large number of sellers producing differentiated product. 4)Oligopoly involves only a few sellers; this “fewness” means that each firm is affected by the decisions of rival and must take these decisions into account in determining its own price and output. Pure competition assumes that firms and resources are mobile among different kinds of industries.
In the short run, oligopolies are. able to earn abnormal profits, but in the long run as well they are. able to sustain abnormal profits due to the barriers to entry and exit. Then the s The barriers act as a strong deterrent to firms that want to come in. the industry and " eat into" the abnormal profits and then exit the market.
The second market structure is a monopolistic competition. The conditions of this market are similar as for perfect competition except the product is not homogenous it is differentiated; thus having control over its price. (Nellis and Parker, 1997). There are many firms and freedom of entry into the industry, firms are price makers and are faced with a downward sloping demand curve as well as profit maximizers. Examples include; restaurant businesses, hotels and pubs, specialist retailing (builders) and consumer services (Sloman, 2013).
When the price of raw material will go up or down, the production coats will rise or fall. Secondly, the price of substitute products also affect the supply curve. Because the relatived products are competitive relationship, when the price of one product goes up, another will goes down. It will affect suppy. Thirdly, production technology will affect the supply curve. When the level of technology is rising or falling , the production costs will go down or up. finally, the government policies will affect the supply curve. Positive policies will make the supply go up, conversely, it will go down. For example, the govenrment limit the amount of cars which people can buy, it will caused the supply curve down. In addition, the price of product in the future and the development of product company will also affect the supply
There are high entry costs to enter the market. The large industry competitors already have captured the market share.
The Perceived Demand Curve for a Perfect Competitor and Monopolist (Principle of Microeconomics, 2016). A perfectly competitive firm (a) has multiple firms competing against it, making the same product. Therefore the market sets the equilibrium price and the firm must accept it. The firm can produce as many products as it can afford to at the equilibrium price. However, a monopolist firm (b) can either cut or raise production to influence the price of their products or service. Therefore, giving it the ability to make substantial products at the cost of the consumers. However, not all monopolies are bad and some are even supported by the
In a perfectly competitive market, the goods are perfect substitutes. There are a large number of buyers and sellers, and each seller has a relatively small market share. Perfect competition has no barriers to information regarding prices and goods, meaning there is no risk-taking behaviour – sellers and buyers are rational. There is also a lack of barriers for entry and exit.