Question

Summarize key facts from this week's material. Keeping in mind the constraints of perfect competition, what are some pieces of advice you could give to a firm operating in a perfectly competitive market. The reflection should be roughly one page in length.

Answer 1

A perfectly competitive market is characterized by a larger number of firms and buyers. Price is determined through the demand and supply forces. Thus, the firm is price takers in the market. Following advice can be given to firm operating in a competitive market structure:

• The firm should charge the price that prevails in the market only if it charges price which is larger than ones prevailing market would cause all customers moving away from the firm. Since buyers have perfect information about the market.
• A firm must not waste expenditure on advertisements since there is no use of spending on advertisement. Products are homogeneous.
• A firm must stay in the market in the short run if it suffers the loss but still is able to recover the variable cost of production. The Firm should shutdown facility if is not even able to recover the variable cost.
• Over the long run, the firm must shutdown its facility if it suffers the loss or price is less than the average cost of production.