Question

1. State the profit-maximizing conditions (rules) under perfect competition in the short-run.

2. State the profit-maximizing conditions (rules) under perfect competition in the long-run, explain why perfect competition suggests market efficiency? What about market fairness, equality, social justice, and all other social goals?

Answer 1

1.Profit maximizing conditions under perfect competition in the short run are as follows-

• The firms must equate the marginal revenue to its marginal cost to experience an economic profit.
• Secondly, the firms must set their prices above the average total cost curve for positive profits.

2. In the long run, under perfectly competitive market the firms incur zero economic profits because of the entry of new firms which shifts the demand curve downwards for each firms and hence, the economic profits cannot be sustained.However, in order to keep functioning in the economy it must have an equilibrium where the price of product intersects with the average cost curve and the marginal cost.  

Perfectly competitive markets can efficiently allocate all its scare resources. This is owing to the fact that the profit maximizing quantity of output is produced by equating the price and the marginal cost. In the long run, since the firms set its price equal to the lowest point of the average cost curve, it also have a production advantage than firms in other markets.

Market faireness- It is a fair market because it has no barrier to entry or exit, so that there is no discrimination between the buyers and sellers; allowing complete mobility of resources. The prices are fixed by the market forces of supply and demand. Everyone is completely informed about the market structure and the goods sold are also homeogenous. This promotes fair market with no cost advantage of one firm to the other.

Equality - Perfect competition promotes equality as there are no differentiated goods and none of the firms can set prices according to their individual choice. Since the prices are also fixed by the market, it gives equal opportunity to all for earning economic profits on fair grounds.

Social Justice - Since under perfect competition, the economy achieves a pareto efficiency, the social welfare of an economy is maximised which in turn helps in achieving equitable access of resources and, thus making it socially just.

Social goals- Other social goals such as efficiency, growth, productivity, etc are also achieved through perfectly comepetitive market structure.