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Chapter 8: Q.8 (page 211)

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?

Short Answer

Expert verified

Supply in the market falls and hence price rises.

Step by step solution

01

Introduction

The perfect competition takes place if all firms sell similar items, market share has no effect on the price, companies can enter and exit without hindrance, buyers have perfect or complete information, and companies cannot determine prices.

02

Explanation

As the wages rise, cost of productions rises too. When cost of production goes up at the prevailing wages, some firms will face losses. This is because overall, a firm in perfect competitive market can't earn economic profit. They can just cover up the costs incurred.

So, some firms will shut down. This leads to a upward shift in the prices of the commodities due to reduced supply. Such adjustments will continue in the market till the firms earn 0economic profits.

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Most popular questions from this chapter

Would independent trucking fit the characteristics of a perfectly competitive industry?

A firm鈥檚 marginal cost curve above the average variable cost curve is equal to the firm鈥檚 individual supply curve. This means that every time a firm receives a price from the market it will be willing to supply the amount of output where the price equals marginal cost. What happens to the firm鈥檚 individual supply curve if marginal costs increase?

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

Assuming that the market for cigarettes is in perfect competition, what does allocative and productive efficiency imply in this case? What does it not imply?

Suppose that the market price increases to $6, as Table 8.14 shows. What would happen to the profit-maximizing output level?
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