Perfect Competition
Perfect competition:
For a market to be perfectly competitive, one of the main criteria is that all firms (and consumers) are price takers.
The following conditions are also necessary:
1. There must be many buyers and sellers in the market for an identical product.
2. Firms' products are identical.
3. Buyers and sellers must be fully informed about prices, products, and technology.
4. There are no barriers to entry (or exit).
5. Selling firms are profit-maximizing entrepreneurial firms.
The scenario about the ice cream industry depicts a perfectly competitive market. Buyers view vanilla ice cream from different stores as identical products, new stores can enter the industry, and each store has no influence on the going market price.
In perfect competition, many firms sell identical products to many buyers. Therefore, if Falero charges even slightly more for a box than other firms charge, it will lose all its customers because every other firm in the industry is offering a lower price. In other words, one of Falero's boxes is a perfect substitute for boxes from the factory next door or from any other factory. So, a perfectly competitive firm faces a perfectly elastic demand for its output at the current market price.
In this case, the equilibrium market price is $5 per box, so Falero faces a perfectly elastic demand curve for its boxes at $5.
Since a perfectly competitive firm faces a perfectly elastic demand curve at the market price, it can sell any quantity it chooses at this price. Therefore, the change in total revenue that results from a one-unit increase in the quantity sold is equal to the market price, so the marginal revenue curve is a horizontal line at the market price of $5 per box. Since the demand curve is also a horizontal line at the market price, the demand curve and the marginal revenue curve are the same.
Economic profit equals total revenue minus total cost, so profit is at its maximum when the difference
For a market to be perfectly competitive, one of the main criteria is that all firms (and consumers) are price takers.
The following conditions are also necessary:
1. There must be many buyers and sellers in the market for an identical product.
2. Firms' products are identical.
3. Buyers and sellers must be fully informed about prices, products, and technology.
4. There are no barriers to entry (or exit).
5. Selling firms are profit-maximizing entrepreneurial firms.
The scenario about the ice cream industry depicts a perfectly competitive market. Buyers view vanilla ice cream from different stores as identical products, new stores can enter the industry, and each store has no influence on the going market price.
In perfect competition, many firms sell identical products to many buyers. Therefore, if Falero charges even slightly more for a box than other firms charge, it will lose all its customers because every other firm in the industry is offering a lower price. In other words, one of Falero's boxes is a perfect substitute for boxes from the factory next door or from any other factory. So, a perfectly competitive firm faces a perfectly elastic demand for its output at the current market price.
In this case, the equilibrium market price is $5 per box, so Falero faces a perfectly elastic demand curve for its boxes at $5.
Since a perfectly competitive firm faces a perfectly elastic demand curve at the market price, it can sell any quantity it chooses at this price. Therefore, the change in total revenue that results from a one-unit increase in the quantity sold is equal to the market price, so the marginal revenue curve is a horizontal line at the market price of $5 per box. Since the demand curve is also a horizontal line at the market price, the demand curve and the marginal revenue curve are the same.
Economic profit equals total revenue minus total cost, so profit is at its maximum when the difference