Cyril owns a company that is part of a perfectly competitive market. He is thinking about...

Cyril owns a company that is part of a perfectly competitive market. He is thinking about increasing his prices, hoping it will increase his profit. Knowing you have taken an economics course, he turns to you for advice. What should you tell him? Briefly explain your answer (2 pts.)

Expert Solution

It has been provided that Cyril's company is part of a perfectly competitive market.

A firm in the perfectly competitive market acts as the price taker. It has no power ot determine the price and has to accept the price as determined by the market.

This lack of market power to determine price is due to following reasons -

1. Each firm sells homogeneous product and due to this buyers cannot differentiate between products of two firms and thus would pay the same price for the product.

2. In perfectly competitive market, buyers and sellers have perfect information with respect to market condition. As buyers knows the market price, they will not pay anything more than that.

So, being a perfectly competitive firm, Cyril's company has to accept the market price and if he tries to increase the price then in such case he would not be able to sell anything as buyers (due to homogeneous product and perfect knowledge of market conditions) will shift to other sellers.

Thus, we will advise the Cyril not to increase the price as such increase in price by him will not increase his profit. This act will reduce his revenue to zero and would lead to loss.

Rahul Sunny answered 2 years ago

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