The Behavior of Perfectly Competitive Market

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THE BEHAVIOR OF PERFECTLY COMPETITIVE MARKET

*We now come to one of the most important topic in econ: how firms respond to the price signals that the market sends them. - common sense would tell that if price goes up – prod’n will increase. * but now, armed with our knowledge about prod’n and cost, we can achieve a much sharper understanding of the supply behavior of competitive firms and industries. *the questions in this chapter would be: How exactly does a business enterprise behave? How much should they produce? i.e. How much should farmers produce now that the price of rice is P 25? Such questions concerns the supply behavior of PCF

In line with this, we will assume that competitive firms maximizes profits, which is TR – TC. *Profit Maximization requires that firm manage its internal operations (prevent waste, encourage worker morale, choose efficient prod’n process and so forth) and make sound decisions in the market place (buy correct quantity of inputs at least cost and choose optimal level of output). * Why would firm π max? it is like the net earnings or take-home pay of a corporation. They represent the amount a firm can pay in dividends to the owners… Under PCF, recall these key points:

1. Under perfect competition, there are many small firms, each producing an identical product and each too small to affect the market price. 2. the perfect competitor face a completely horizontal demand curve 3. the extra revenue gained from each extra unit sold is therefore the market price.

Competitive Supply where marginal cost equals price

*Given its cost, demand and desire to maximize profits, how do competitive firms decide on the amount it will supply?
- Clearly, the amount of output supplied will depend on cost of production.

*example: if bicycle will only cost P10 a dozen, no one would supply because the price will not even cover the cost of its seats. But if one bicycle costs a million, many would open a new bicycle firms.

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