Under competitive competitions, why can a market price not be higher or lower than the price...

Under competitive competitions, why can a market price not be higher or lower than the price established by the free market forces of demand and supply?

Expert Solution

Under competitive competitions ,the price is determined by the market forces . All firms have to sell their product at that price, no firm can influence price by its single action . Every firm is a price taker. The market price cannot be higher than the price established by the free market forces of demand and supply because if the firms charge higher price ,then consumers won't buy the good from it and lose the demand of its product , as there are other firms who are selling the same good at the free market price which is lower than what this firm is charging. Therefore, a market price cannot be higher than the free market price.

Similarly, a market price cannot be lower than the price established by the free market forces of demand and supply because the firm do not have any incentive to charge the lower price, wen it can sell all the output at a higher price.

Hence, under competitive competitions , market price not be higher or lower than the price established by the free market forces of demand and supply .

Rahul Sunny answered 2 years ago

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