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Chapter 8: Q1 (page 210)

Firms in a perfectly competitive market are said to be “price takers”—that 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

If new technology in a perfectly competitive market brings about a substantial reduction in costs of production, how will this affect the market?

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’s 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.

Look at Table 8.13. What would happen to the firm’s profits if the market price increases to $6 per pack of raspberries?

A firm’s marginal cost curve above the average variable cost curve is equal to the firm’s 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’s individual supply curve if marginal costs increase?

A single firm in a perfectly competitive market is relatively small compared to the rest of the market. What does this mean? How “small” is “small”?
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