Parking Economics Issues - Essay Example

Perfect competition is a situation that develops in the market over time. In this period, many firms sell the same products to many buyers no restrictions have been set forth to restrict entry into the industry. In a perfect competition situation, firms that have established themselves in the market have no advantage over the firms that are entering the industry. In such a situation, all buyers and sellers are well informed of the prices of products in the market. A perfect competition situation arises when the efficient scale of a firm is small when compared to the market demand; this provides room for other firms to join. Each of the firms produces goods or services that do not have any unique characteristics when compared to the other firms.

In perfect competition, each firm takes the price that is in the market. Not a single firm can set or determine the price of the goods, and they must take the equilibrium price. The output of each firm is usually a perfect substitute for the other firms’ output. The demand for the firm’s output is thus perfectly elastic. The market supply and demand, determine the market price that a firm must take. All firms can sell any quantity of goods at the market price. The marginal revenue is equal to the price. The demand curve for the products is horizontal at the market price (Parkin, 12).

The demand that is associated with the products of a firm is perfectly elastic; because a sweetener for one firm is a perfect substitute for the sweetener of the other firm. The market demand can thus not be perfectly elastic since the sweetener is a substitute for other goods. In perfect competition, the goal of any firm is to maximize profits given the constraints that the firm will face. The firm must then decide on how to reduce production costs, what quantity of goods to produce and when the firm should enter or exit the market (Parkin, 35).

In a perfectly competitive firm, the output that maximizes the economic profit is chosen. The firm looks at the total revenue and the total cost curves to find the profit-maximizing output, the difference between the total revenue and the total cost is the economic profit. At low output levels, a firm will incur an economic loss and with this, the firm cannot recover the fixed costs. At the intermediate level, the firm makes some economic profit (Parkin, 36).

The firm can also use marginal analysis to determine the profit-maximizing output. Marginal revenue is constant, and the marginal cost increases as the output increases, with this, the profit is maximized by producing at the output at which the marginal revenue is equal to the marginal cost (Khan, 56).

When a firm makes an economic loss, the firm must make a decision, to stay or exit the market. If the firm chooses to stay, it must decide if to keep producing to shut down temporarily. The decision made should be one that aims at minimizing the economic loss of the firm. The point of the shutdown is attained when the firm makes no difference in producing and not producing. Firms enter an industry in which the other firms are making an economic profit and exit the industry when the firm incurs an economic loss.