Economics Perfectly Competitive Market Structure
draw a diagram of a perfectly competitive firm earning a positive economic profit assume the wages, which the firm pays to its workers, falls. Illustrate the impact of such an event on the price, output and profits of this firm
2. Examine the following statement to see whether it is true or false. If it is true, explain why it is true. If it is false, explain why it is false and then write the statement correctly.
A profit maximising perfectly competitive firm should select the output level at which the difference between the marginal revenue and marginal cost is greatest. This is equivalent to selecting the output where the spread between total revenue and total cost is greatest.
In the short-run, it is possible for an individual firm to make an economic profit. This situation is shown in this diagram, as the price or average revenue, denoted by P, is above the average cost denoted by C .
However, in the long period, economic profit cannot be sustained. The arrival of new firms or expansion of existing firms (if returns to scale are constant) in the market causes the (horizontal) demand curve of each individual firm to shift downward, bringing down at the same time the price, the average revenue and marginal revenue curve. The final outcome is that, in the long run, the firm will make only normal profit (zero economic profit). Its horizontal demand curve will touch its average total cost curve at its lowest point. (Seecost curve.)
In a perfectly competitive market, a firm's demand curve is perfectly elastic. at a loss [R < TC (revenue less than total cost) or P < ATC (price less than unit cost)] must decide whether to continue to operate or temporarily shutdown.[14] The shutdown rule states "in the short run a firm should continue to operate if price exceeds average variable costs."[15] Restated, the rule is that for a firm to continue producing in the short run it must earn sufficient revenue to cover its variable costs.[16] The rationale
2. Examine the following statement to see whether it is true or false. If it is true, explain why it is true. If it is false, explain why it is false and then write the statement correctly.
A profit maximising perfectly competitive firm should select the output level at which the difference between the marginal revenue and marginal cost is greatest. This is equivalent to selecting the output where the spread between total revenue and total cost is greatest.
In the short-run, it is possible for an individual firm to make an economic profit. This situation is shown in this diagram, as the price or average revenue, denoted by P, is above the average cost denoted by C .
However, in the long period, economic profit cannot be sustained. The arrival of new firms or expansion of existing firms (if returns to scale are constant) in the market causes the (horizontal) demand curve of each individual firm to shift downward, bringing down at the same time the price, the average revenue and marginal revenue curve. The final outcome is that, in the long run, the firm will make only normal profit (zero economic profit). Its horizontal demand curve will touch its average total cost curve at its lowest point. (Seecost curve.)
In a perfectly competitive market, a firm's demand curve is perfectly elastic. at a loss [R < TC (revenue less than total cost) or P < ATC (price less than unit cost)] must decide whether to continue to operate or temporarily shutdown.[14] The shutdown rule states "in the short run a firm should continue to operate if price exceeds average variable costs."[15] Restated, the rule is that for a firm to continue producing in the short run it must earn sufficient revenue to cover its variable costs.[16] The rationale