Question

what is PCM stand form and can you provide a basic, mathmatical question and answer. thank you

"perfect competing markets"

Answer 1

Perfectly competitive markets (PCM) are the markets have a large number of buyers and sellers, so, each individual buyer or seller is so small to influence the market price and hence, is the price taker in the market. All the sellers sell homogeneous goods and firms are free to enter or exit this market. Firms earn only normal profits in long run but can incur losses and profit in ahort run.

Numerical,

Suppose, a firm’s demand curve is

P = 11 - Q

and its total cost is,

C = 5Q

Now,

Total Revenue, TR = P*Q = 11Q - Q2

=> Marginal revenue,MR = dTR/dQ = 11 - 2Q

And

Marginal cost, MC = dC/dQ = 5

At Equilibrium,

MR = MC, for profit maximization

=> 11-2Q = 5

=> Q = 3 units

And from the demand funtion we get,

P = $8

Profit = TR - TC = PQ - C = 8*3 - 5*3 = $9

Now, due to this profit, many firms will enter the industry, increasing the supply in the industry and driving down the price till the price equals average total cost. Hence, firms will earn a normal profit in long run.

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