Question

1. On the other hand, the General Motors went on a different direction. General Motors was founded in 1908 and one hundred years old company.  Following the financial crisis in 2008/2009, General Motors filed for chapter 11 bankruptcy protection.  After support from the US government and restructuring, the business operation was able to re-enter the market.  In your ECON 200 class you learnt the conditions at which the firms enter and exit from the market.  Using a graph describes how and when in a perfectly competitive market the firms that are experiencing economic losses close the operation and reenter to the market. In the graph you may use costs and revenue curves.  (25 Points)

Answer 1

A perfectly competitive market like General Motors, is a competitive environment in which there are a large number of companies producing a single product, as well as a large number of buyers. All buyers and sellers have perfect knowledge of the market and the price is determined by the free play of demand and supply on the market.

As we know that firms in perfect competition are price takers, they sell their product at market prices, whatever their cost of production may be. So if, at a given price, a particular firm is suffering an economic loss, it closes the activity, often and again, as prices rise, to the market, it enters.

From the graph, it can be seen that the business is initially in equilibrium at price P where production Q is generated. But when the price starts to fall, the company will continue its operations to the price level P1 where it can cover its average variable cost, but if the price continues to fall to P2, at this point the company will not even be able to cover its AVC and will incur economic losses, so that the company will shut down its operations sometimes to minimize its losses. But as soon as the price rises to P1 or P, the company returns to the markets and begins production to make profit.

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