Question

What factors are associated with Perfect Competition? What is the shape of the demand curve for a firm in a perfectly competitive market? What is the profit maximizing level of output for a firm in a perfectly competitive market? What is the relationship between Price, Marginal Revenue and Marginal Cost at the profit maximizing level of output?

Answer 1

The features of perfect competition are:

1. Large Number of Sellers and Buyers: The number of buyers and sellers are large. No buyer or seller can influence the price. The producers are price takers.
2. Products are identical. The products are homogeneous.
3. Perfect information. The buyers have perfect information about the products being sold and prices charged.
4. Perfect mobility of resources like labor
5. Entry and exit from the industry happens freely.

The demand curve for a perfectly competitive firm is horizontal which means that a perfectly competitive firm can sell any amount of goods at the current market price. MR=P for the firm in a competitive industry since the firm is price taker.

In the short run, a perfectly competitive firm will produce at the level where MR=MC. In the long run, a competitive firm is in equilibrium when MR=MC=AC. It will produce that output where MR= LMC=LAC. Because if P is less than AC, the firm is suffering a loss.