Answer to Question #74324 in Microeconomics for Bivek Ghimire

Question

Why can’t a perfectly competitive firm influence industry price?

Answer 1

A perfect competitive form exists in an industry structure with many firms. None of the firms is large enough to influence the industry because of the following reasons; firstly, contribution of all the producers is insignificant to the market such that their own levels do not change the supply curve. Secondly, all producers are price takers and cannot influence the market. Consumers would buy from a competitor at a lower price if a firm raises its prices. Thirdly, the products are homogeneous such that the characteristics of a service or good do not vary between suppliers. Fourthly, there is freedom of exit and entry for the producers. Then, sellers and buyers have perfect information about the utility, price, production methods of products, and quality. Moreover, transaction costs do not exist such that sellers and buyers do not incur costs in goods exchange in the perfect competitive market. Lastly, producers no economic benefits in the long run (Sexton, 2015).