Answer to Question #155149 in Economics of Enterprise for Hlelokuhle

Question

In a perfectly competitive market for widgets, the market price is R15. Use the cost information  for a firm producing widgets in this market given in the table below and answer Question 6

Answer 1

The main features of a perfectly competitive market are:

A large number of firms, each firm has a small market share + a large number of buyers

Uniformity of the sold product - it does not matter for the consumer which product to buy, he does not distinguish between the products of different firms

No entry/exit barriers - any company is capable of starting a break-even operation (no need to buy a license, no need for large investments in equipment); any firm is able to stop production without additional costs associated with liquidation

In a perfectly competitive market, there is no strategic behavior by firms. Each firm is too small to influence the rest of its sales and price in the market by its actions. An individual seller, of course, can set a price for his product that is different from the market price, but if his price is higher than the price at which his competitors are selling, then no one will buy the goods of this seller, and if his price is lower than the prevailing market price, then he may simply sell his goods faster than other manufacturers, and in this case, the firm may receive a negative profit, while the market price will not change. Also, firms in a perfectly competitive market do not have market power - a firm cannot influence the price prevailing in the market by changing the number of products sold. Buyers also do not have monopoly power in a perfectly competitive market - there are too many of them, like firms

In a completely competitive market, full awareness reigns - all sellers and all buyers know everything about each transaction, about the number of products sold, about its price.

There is no non-price competition in this type of market - firms, for example, do not advertise their goods. It is unprofitable for them because advertising costs increase the total costs of the company, which is not very favorable for it - if it increases the price (and competitors leave it at the same level) to cover advertising costs, it will lose all its customers if it does not change price, then its profit will decrease in comparison with the country, because the company should not count on compensation for advertising costs due to a large increase in the number of buyers - the product is homogeneous on the market, the increase in purchases can be evenly distributed among all sellers