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Chapter 8: Q1 (page 210)

Firms in a perfectly competitive market are said to be 鈥減rice takers鈥濃�攖hat is, once the market determines an equilibrium price for the product, firms must accept this price. If you sell a product in a perfectly competitive market, but you are not happy with its price, would you raise the price, even by a cent?

Short Answer

Expert verified

Perfect competition have constant prices with perfectly elastic demand, so price can't be increased.

Step by step solution

01

Perfect Competition Definition 

It is a market with :

  • Large number of buyers and sellers, earning only normal profits in long run
  • Identical Goods, Uniform (industry taken) prices, Perfectly Elastic (horizontal) demand
  • Free entry & exit, full information
02

Price Determination Concept 

Perfect Competition' large number of sellers have no significant share in market supply, and hence no control over price determination.

The firm just has to 'take' the industry determined price.

Individual firm demand is perfectly elastic & horizontal, infinite quantities can be sold at constant prices.

03

Detailed Explanation 

So, Individual firm can't change the price. Doing so even by slightest extent (cents) would make them lose all customers. As demand is perfectly elastic ie infinitely responsive to price change.

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Most popular questions from this chapter

A market in perfect competition is in long-run equilibrium. What happens to the market if labor unions are able to increase wages for workers?

1. A computer company produces affordable, easy-to-use home computer systems and has fixed costs of \(250. The marginal cost of producing computers is \)700 for the first computer, \(250 for the second, \)300 for the third, \(350 for the fourth, \)400 for the fifth, \(450 for the sixth, and \)500 for the seventh.

a. Create a table that shows the company鈥檚 output, total cost, marginal cost, average cost, variable cost, and average variable cost.

b. At what price is the zero-profit point? At what price is the shutdown point?

c. If the company sells the computers for \(500, is it making a profit or a loss? How big is the profit or loss? Sketch a graph with AC, MC, and AVC curves to illustrate your answer and show the profit or loss.

d. If the firm sells the computers for \)300, is it making a profit or a loss? How big is the profit or loss? Sketch a graph with AC, MC, and AVC curves to illustrate your answer and show the profit or loss.

In the argument for why perfect competition is allocatively efficient, the price that people are willing to pay represents the gains to society and the marginal cost to the firm represents the costs to society. Can you think of some social costs or issues that are not included in the marginal cost to the firm? Or some social gains that are not included in what people pay for a good?

What prevents a perfectly competitive firm from seeking higher profits by increasing the price that it charges?

Productive efficiency and allocative efficiency are two concepts achieved in the long run in a perfectly competitive market. These are the two reasons why we call them 鈥減erfect.鈥� How would you use these two concepts to analyze other market structures and label them 鈥渋mperfect?鈥�
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