Economics Essay

411 WordsApr 3, 20152 Pages
In contrast to a monopoly or oligopoly, it is impossible for a firm in perfect competition to earn economic profit in the long run, which is to say that a firm cannot make any more money than is necessary to cover its economic costs. If it did, there would be an incentive for new firms to enter the industry, aided by a lack of barriers to entry until there was no longer any profit. As new firms enter the industry, they increase the supply of the product available in the market, and these new firms are forced to charge a lower price to entice consumers to buy the additional supply these new firms are supplying (they compete for customers). Firms within the industry face losing their existing customers to the new firms entering the industry, and are therefore forced to lower their prices to match the lower prices set by the new firms. New firms will continue to enter the industry until the price of the product is lowered to the point that it is the same as the average cost of producing the product, and all of the economic profit disappears. When this happens, economic agents outside of the industry find no advantage to entering the industry, supply of the product stops increasing, and the price charged for the product stabilizes. Since average revenue is typically the price of a good, the average revenue curve is also the demand curve for a firm’s output. The average revenue curve for a firm with no market control is generally horizontal. The average revenue curve for a firm with market control is negatively sloped. Freedom of entry Numerous small firms Perfect competition- a perfect competition occurs in an industry when it is made up of many small firms producing homogeneous products Price Taker- When a company or individual that has no influence over the effect of the price of an item. They have no choice or say in setting prices. Chapter 11- Test

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