Perfect Market Essay

458 Words2 Pages
------------------------------------------------- A perfectly competitive market a) Introduction to the topic A perfectly competitive market has three main characteristics; there are many buyers and sellers, goods are homogenous and there is free entry and exit into and out of the market. The reason to there being many buyers and sellers is because perfectly competitive firms operate at an efficient scale, which means a high consumers surplus, and because sellers can sell as much quantity as they like at the given market price. It's not desirable for sellers to decrease the price of their goods as this would reduce their profits, they also have no incentive to increase prices as this would lead them to have no demand, as consumers have perfect market knowledge and are able to purchase close substitute goods. Each firm operating in this market is known to be a price taker. The aim of perfectly competitive firms is to maximize their profits. The price of a good is equal to average revenue which is equal to marginal revenue, as this is the market price set for each quantity of the good. A firm will maximize their profits when price is equal marginal costs. If a new firm see's that the market is profitable then this is attractive to them and they will enter the market. However, this will have the effect of increasing supply and Quantity which will lower the price and profits for all firms operating in that market. This could inevitably lead to some firms making zero profits. If this happens and the price of a good becomes less than their average total costs of production, then a firm may take the decision to shut down. They will still have to pay for their fixed and sunk costs, but they will be able to return to the market when economic conditions improve. In today's climate, many firms (especially firms selling goods with an elastic price elasticity of
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