Question

A competitive market is characterized by many buyers and sellers trading identical products, with little ability to influence market prices. With nearly identical products and no influence over market prices, how do businesses compete with each other?

Imagine that you are going to start your own small business. How will you maximize profits and stay competitive in the market? Describe your business and use the concepts from this module and earlier modules to discuss the following:

What fixed and variable costs would you incur?

How will you determine the price for your product?

How much product you would produce?

Provide an example of one situation that would cause you to shut down production temporarily. Explain your answer using an equation with sample numbers.

Provide an example of one situation that would cause you to exit the market permanently. Explain your answer using an equation with sample numbers.

Answer 1

when there are large no of buyer and seller trading identical product with no influence on market price then this type of market situation is perfect competion under perfect competitive market sellers in the long run earn normal profit(total revenue just equal to total cost).

If I am going to start a buisness I will try to create a monopoly and if i will have a monopoly then I can practically set price at my own will and can earn abnormal profit but in practical life it is very difficult to create a monopoly .

fixed cost are those cost which do not change which quantity of output produced and variable cost are those cost which changes with quantity of output produced

suppose i am opening a flour mill plant thant i have to buy a flour mill plant that is going to be my fixed cost and i have to also buy wheat as a raw material which my varialble cost .In the below example fixed cost is 1800 and variable cost is 50Q+3Q^2

It will be not optimumm to run a industry if in a long run a firm is incurring a loss for example if revenue function is

TR=50-2Q

where q = quantity

so if the production is beyod 25 unit then the total revenue will be negative and firm will incur loss so its better to shutdown beyond 25 unit of production .