Question

In: Economics

a) Identify three types of industries that fit into the Perfect Competition industry. Justify why you...

a) Identify three types of industries that fit into the Perfect Competition industry. Justify why you would classify each one into Perfect Competition.

b) What happens in the long run to existing companies in an industry? To the new companies in the industry and to the industry as a whole? What will happen to the price and average costs in the long run?

Solutions

Expert Solution

a) Stock exchange, agricultural market and free software market are the close examples of competitive markets if not the perfect one. Here following features are common to a perfectly competitive market

  • Free entry and exit
  • Long run has no economic profit
  • Large number of buyers and suppliers
  • Availablity of accessible information
  • Identical products

b) In the long run when entry/exit is possible, firms start entering the market if previously there were profits and firms start leaving the market if previously there were losses. This shifts the market supply curve changing the price and market quantity. This process of entry and exit continues till each firm now earns a no economic profit. To existing companies, to the new companies in the industry and to the industry as a whole, all experience zero economic profit.

Price is reached its long run level determined by the minimum of AC curve. Hence every firm operates at its minimum level of ATC ensuring productive and allocative efficiency.


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