Question

In Perfect Competition industry, how does a firm decide how much to sell? Can it raise prices to make greater profits? Be specific and give details to support your answer.

Answer 1

In a perfectly competitive industry, the price of the good is decided by the supply and demand forces. A firm only decides how much good they can sell at that price.

In an equilibrium point, the firm produces at the lowest point of the average total cost curve which is also the price of the market. If the firm is producing at the point where the average total cost is decreasing it will produce more and increase its revenue but if the firm is producing at the point where the average total cost is high it is facing a loss and they will reduce the production.

In a perfectly competitive market, we assume complete knowledge and the firms have an identical cost curve i.e. all the firms in the market uses the same input and the cost incurred to produce the good is same.

If it raises the price to increase the profit it will lose all its consumer because the demand curve an industry faces in the market is perfectly elastic, if they decrease the price they will face loss. So, they can't increase the price as the price is decided by the market and the firm has to sell at that price only.