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    Analysis of Perfectly Competitive Market

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    Sharif Hassan
    1) The document analyzes perfectly competitive markets and the behavior of competitive firms. It discusses two key assumptions - firms maximize profits and are price-takers in an atomistic market. 2) Under perfect competition, there are many small firms producing identical products, each too small to impact market price. Firms face a horizontal demand curve and maximize profits by producing where marginal cost equals price. 3) In the short run, firms may continue operating even at a loss if losses are less than fixed costs. In the long run, the market supply curve is obtained by adding individual firm supply curves horizontally.

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    Analysis of Perfectly Competitive Market

    Uploaded by

    Sharif Hassan
    177 views10 pages
    1) The document analyzes perfectly competitive markets and the behavior of competitive firms. It discusses two key assumptions - firms maximize profits and are price-takers in an atomistic market. 2) Under perfect competition, there are many small firms producing identical products, each too small to impact market price. Firms face a horizontal demand curve and maximize profits by producing where marginal cost equals price. 3) In the short run, firms may continue operating even at a loss if losses are less than fixed costs. In the long run, the market supply curve is obtained by adding individual firm supply curves horizontally.

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    Analysis of Perfectly competitive market

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    1) The document analyzes perfectly competitive markets and the behavior of competitive firms. It discusses two key assumptions - firms maximize profits and are price-takers in an atomistic market. 2) Under perfect competition, there are many small firms producing identical products, each too small to impact market price. Firms face a horizontal demand curve and maximize profits by producing where marginal cost equals price. 3) In the short run, firms may continue operating even at a loss if losses are less than fixed costs. In the long run, the market supply curve is obtained by adding individual firm supply curves horizontally.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    177 views10 pages

    Analysis of Perfectly Competitive Market

    Uploaded by

    Sharif Hassan
    1) The document analyzes perfectly competitive markets and the behavior of competitive firms. It discusses two key assumptions - firms maximize profits and are price-takers in an atomistic market. 2) Under perfect competition, there are many small firms producing identical products, each too small to impact market price. Firms face a horizontal demand curve and maximize profits by producing where marginal cost equals price. 3) In the short run, firms may continue operating even at a loss if losses are less than fixed costs. In the long run, the market supply curve is obtained by adding individual firm supply curves horizontally.

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    Analysis of Perfectly

    Competitive Markets
    Prepared by:
    Md. Sharif Hassan
    Lecturer, DBA, UAP
    BEHAVIOR OF A COMPETITIVE FIRM

    • Analysis of perfectly competitive firms relies on two key


    assumptions.
    • First, we will assume that our competitive firm maximizes
    profits.
    • Second, perfect competition is a world of atomistic firms who
    are price-takers.
    Profit Maximization
    • Profits are like the net earnings or take-home pay of a business. They represent
    the amount a firm can pay in dividends to the owners, reinvest in new plant and
    equipment, or employ to make financial investments. All these activities
    increase the value of the firm to its owners.
    • Profit maximization requires the firm to manage its internal operations
    efficiently (prevent waste, encourage worker morale, choose efficient
    production processes, and so forth) and to make sound decisions in the
    marketplace (buy the correct quantity of inputs at least cost and choose the
    optimal level of output).
    Perfect Competition
    • Under perfect competition, there are many small firms, each
    producing an identical product and each too small to affect the
    market price.
    • The perfect competitor faces a completely horizontal demand.
    • The extra revenue gained from each extra unit sold is therefore
    the market price.
    Perfect Competition
    Competitive Supply Where
    Marginal Cost Equals Price
    Competitive Supply Where
    Marginal Cost Equals Price
    • A profit-maximizing firm
    will set its output at that
    level where marginal cost
    equals price.
    Diagrammatically, this
    means that a firm’s marginal
    cost curve is also its supply
    curve.
    Zero Point & Shutdown Rule
    • The shutdown point comes where revenues just cover variable
    costs or where losses are equal to fixed costs. When the price
    falls below average variable costs, the firm will maximize
    profits (minimize its losses) by shutting down.
    • The analysis of shutdown conditions leads to the surprising
    conclusion that profit-maximizing firms may in the short run
    continue to operate even though they are losing money. This
    condition will hold particularly for firms that are heavily
    indebted and therefore have high fixed costs (the airlines being
    a good example). For these firms, as long as losses are less
    than fixed costs, profits are maximized and losses are
    minimized when they pay the fixed costs and still continue to
    operate.
    SUPPLY BEHAVIOR IN
    COMPETITIVE INDUSTRIES
    • The market supply
    curve for a good in a
    perfectly competitive
    market is obtained by
    adding horizontally the
    supply curves of all the
    individual producers of
    that good.
    SHORT-RUN AND LONG-RUN
    EQUILIBRIUM

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