Perfect Competition Essay Samples

Perfect Competition

...will stay in business as long as price covers average variable costs. In the long run, firms will stay in business as long as price covers average total costs. In the short run, an increase in demand will lead to a rise in price; whether the price in the long run will be higher than, lower than, or equal to its original level depends on whether the firm is in an increasing, decreasing, or constant-cost industry. A perfectly competitive firm is a price taker. It sells its product only at the market-established equilibrium price. The perfectly competitive firm faces a horizontal demand curve. Its demand curve and marginal revenue curve are the same. The perfectly competitive firm maximizes profits by producing the quantity of output at which MR=MC. For the perfectly competitive firm, price equals marginal revenue. A perfectly competitive firm is resource allocative efficient because it produces the quantity of output at which P=MC. If P>ATC (>AVC), the firm earns economic profits and will continue to operate in the short run. If PP>AVC, the firm takes losses. Nevertheless, it will continue to operate in the short run because the alternative increases the losses. The firm produces in the short run only when price is greater than average variable cost. Therefore, the portion of its marginal cost curve is the firm’s short-run supply curve. Long-run competitive equilibrium exists when there is no incentive for firms to enter or exit the industry. There is no incentive for firms to produce more or less output, and there is no incentive for firms to change plant size. Economic profits are zero, firms are producing the quantity of output ...

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