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Perfect Competition - Essay Example
1. Firms in perfect competition are Price takers. There are several firms in the Market(industry) that every individual firm generates an immaterially undersized percentage of whole industry supply, and consequently has no control what so ever to influence the price of the good.
Types of the services and commodities produced in perfect competition are undifferentiated (homogenous) i.e. the commodities produced are alike and because of this cause there is Promotion, marketing or publicity. Though it is not possible for a firm to be perfect model of perfect competition but there are some that are nearer for example; Stock Market, as there are lots of purchasers and vendors, no obstructions to entry and the good is not differentiated. (Mahanty, p. 264)
There is absolute sovereignty of admission of new firms into the Market. Firms already operating in the market are not capable to prevent new firms enter the business. Starting a business takes time, therefore freedom of entry concerns in the long run. An extension of this assumption is that there is complete factor mobility in the long run. If earnings are elevated than somewhere else, resources will be liberally attracted into that business. Similarly if wages are elevated than for comparable labor somewhere else, employees will liberally shift into that business and will face no hurdles. (Schnaars, p. 31)
If the firm's average cost (AC) curve (which incorporates normal profit) hangs beneath the firm's average revenue (AR) curve, the firm will make abnormal profit. Abnormal profit for each unit at Q1 is the vertical gap amid AR and AC at Q1. Entire abnormal profit is shown by the rectangle P1ABC in Figure 1.1.
There is also a situation when the firm cannot earn a ...