Answer to Question #182274 in Microeconomics for Ghits

Question

Selling T-shirts is easy. Consumers spend at least $15 billion a year on them. Moreover, the inventory is easy to store, doesn’t spoil, and is compact. On the surface, a great business.

But there’s a catch—everybody and his brother sells T-shirts. Every beach resort has dozens of T-shirt shops. And they sprout like weeds at every major sporting or concert venue. And then there are all the online sites that offer custom designs and quick delivery. So, the competition is intense. This makes it near impossible for any T-shirt shop to raise the price of its T-shirts, much less hold on to profits. The owner of a T-shirt shop in South Padre Island, Texas, lamented, “Every day you have to compete with other shops. And if you invent something new, they will copy you.”

Questions:

1.What determine the ability to make profit on this market of T-Shirts?

2.Why is so difficult to maintain profit?

Please give detailed answers with different other examples of the competitive markets.

Answer 1

(1)A seller in perfect competition can earn profits by keeping average cost of production below market price. Therefore the factor that determine the ability to make profit on this market of T-Shirts is cost of production. If the market price of T-shirt is higher than a business firm's average cost of production for the quantity produced, then the profit margin is positive and the firm will earn profits.

(2)A perfectly competitive firm is a price taker and can sell any quantity of the commodity at the market determined price. 

Competition in this T-shirt market is intense because there are large number of sellers in the market. This makes it impossible for a single seller to raise price in order to make profits.