1. Perfectly competitive firm cannot affect the market price 

  • Because all the products sold in the market are identical–any rise in price leads to loss of customers
  • Because there are many buyers and sellers- so the firm isn’t the only firm which sells that product .

2. Perfectly Competitive firm faces a Horizontal demand curve

3. Firm maximizes profit when P=MC=MR

4. The Difference between Price and Average Total Cost equals profit per unit of output.

5.The relationship of Price to Average total cost shows  either the firm is making a profit ,loss or Break even point (total profit=total loss)

  • When P>ATC The firm is making a profit
  • When P=ATC the Firm is at Break Even point
  • When P< ATC the firm is experiencing losses.

6. In the short run, either of the two steps are taken by the firm if it is experiencing losses

  • Continue to produce (It may enable it to reduce its loss below its total fixed cost)
  • Stop Production by shutting down temporarily (And only pay its fixed cost and since the production is zero, it will only suffer a loss equal to its fixed cost).

7. The firm will shut down if it loses an amount greater than its Fixed cost. And If shutting down is the decision than the fixed cost becomes the sunk costs. (In such a market the firm cannot raise it price because it will lose all its customers)

8. The Supply curve of a perfectly competitive firm will produce where Price = Marginal Cost. In other words, the the marginal cost curve would be the firms supply curve.

9. Perfectly competitive firms earns Zero economic profit in the long run. Two situations can occur:

  • Other firms enter the market when they notice an economic profit. The entrance increase the supply of the product which leads to lowering the price. Thus, the industry ends up working at a break even point.
  • In case If demand for a product decreases-the market prices of a product will fall that lead to losses for the firms and causes some of it to exit. Consequently, the supply for the product will decrease as well which will again raise the market price, allowing other firms to raise at a break-even point who were at a loss. Thus, this break even point in the long run is also called the perfectly competitive long run equilibrium where firms produce whatever the consumer demands at a price which is determined by the minimum point of a firm’s average total cost.

10. In the long run, the supply curve of a firm is horizontal when is industry is at a constant cost; Increase demand for input because of an increase demand for the product has no effect on the market price of the inputs (required to make that product). But long run supply curve will be sloping upward in an Increasing -cost industry where the increase in demand for the inputs (required to make the product) causes the market price of some or all inputs to rise.

 

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