As the question says the market for chocolate cookies is competitive thus, this complies with the market structure of Perfect Competition where there are a large number of buyers and sellers in the market. The basic characteristics of a Perfect Competition Market structure are that there is perfect knowledge on both sides of the market that is buyers and sellers know what the current market price is and thus, it prevents exploitation of the consumers as producers would not be able to charge unfair prices. This is because each firm produces an insignificant fraction of the total market supply and therefore is unable to affect price, it is for this reason that each firm in perfect competition is known as a price taker. There are no barriers to entry or exit in a perfectly competitive industry and thus, producers can enter or exit the market without any restrictions and thus, without any significant losses.
The intersection of demand and supply curves of the industry determines the equilibrium price a typical producer can charge which also become the demand of the firm. Due to this, the producers cannot exploit the consumers by charging a high price and thus, the price is always at the equilibrium. This is because if the producers charge a higher price, the demand for the product becomes zero, because the consumers can always switch to another producer as the good is homogenous. (Anderton, 2000)
Since the Firms in Perfect Competition are Price takers so they both take the current market price, ‘Pe’ as shown in the Graph where the Market Demand and Supply intersects and form the Market equilibrium. D0 can be assumed as the Total Demand of Chocolate Cookies in the market and S0 can be assumed as the Total Supply of the Chocolate Cookies in the Market. Not for profit Organisations’ (NPOs) Average Cost (ATCn) is higher than the Average Cost of Profit Making Organisations, that is ATCp, because Not for profit organisations’ (NPOs) employ disabled people and their cost is also high because Profit Making Organisation are making use of Capital Intensive technologies thus, more of their production is automated and they employ fewer workers than the NPOs. Average Cost of the Profit Making Firms (ATCp) is equal to the market Price (Pe) so they are making a “Normal Profit” just because of higher productivity due to which their cost is reduced. A firm makes a Normal Profit when its total Economic Cost, which is Average Cost in other words, is equal to the price firm is charging. In other words it can be said that the firm is making zero economic profit. A firm makes a supernormal profit when its Average Cost (economic cost) is lower than the price it is charging. The NPOs initially in the Short run are making a loss since their Average Cost (ATCn) is greater than the price (Pe) charged. A profit making firm may also make a supernormal profit but in the short run only, in the long run it can only make a normal profit or a zero economic profit. NPOs will be following a cost minimizing price, marginal cost price.
A lump sum tax is a fixed amount that is charged as tax irrespective of a business’s profit, sales revenue or capital. According to Mankiw (2009), A lump sum tax is the most efficient tax possible because the business’s decisions do not alter the tax owed, the tax does not causes any dead weight losses and does not distort any incentives. Since, there is a fixed amount payable as tax so there is no administrative expense of hiring tax lawyers and accountants.
Short run is the time period when at least one inputs in the production process is fixed and the rest are variable. Usually in the short run, the variable input is labour and the fixed input is capital. In the short run, it is assumed that producers can only alter production by changing the variable inputs rather than any fixed inputs. In the short run, existing firms do...
References: Heyne, P., P.J. Boettke and D.L. Prychitko (2009). Economic Way of Thinking (9th Edition).
Mankiw, N.G. (2009). Principles of Economics (5th Edition).
Parkin, M. (2007). Economics (8th Edition).
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