Perfect Competition Essay

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A perfectly competitive industry is initially in a short-run equilibrium in which all firms are earning zero economic profits but are operating below their minimum efficient scale. Explain the long-run adjustments that will create equilibrium with firms operating at their minimum efficient scale. Why is a perfect competitive firm associated with efficiency for both consumers and businesses?
As stated by Case, Fair, and Oster (2009), “In a perfectly competitive industry in the long run, price will be equal to long-run average cost” (p. 268). This, of course, is assuming that companies are using technology that provides constant returns to scale. In addition, large businesses have a no cost advantage. To have the ability to strive in the long-run, companies must compare their products and the prices which they are charging with their competition. With today’s economy changing, predicting profits and losses businesses will endure in the future could be difficult. Products will be more beneficial from the use of consumers and businesses. A perfect competitive firm would be classified as a company running at greatest efficiency; one that is making the consumer happy by offering low prices on quality goods. If the company can offer their goods at a fair price, and still make a profit, then it will benefit by the amount of consumers loyal to its brand.

Equilibrium is a condition that is created when the supply and demand quantities are the same.   If there is equilibrium in the marketplace, then prices typically do not change. According to Case, Fair, and Oster (2009), “In the long run, however, equilibrium in a competitive market is achieved only when economic profits are eliminated” (p. 242). Something that would cause prices to rise in the free market would be when the quantity demanded exceeds the quantity supplied: subsequently when prices rise, the demand falls, and the quantity supplied will rise until equilibrium is reached.   However, in the long-run it is...

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