Custom «Perfectly Competitive Firm» Essay Paper Sample

Perfectly Competitive Firm

Marijis & Hulleman (2008) affirm that in a perfectly competitive market, there exist firms that compete perfectly making it not possible for one firm to control the price of the commodities. The features of the market are that the price of the commodity will always be equal to marginal cost (P=MC). It is given that price will be equivalent to the Marginal Utility (P= MU) that is the level of satisfaction that a consumer derives from the consuming a certain commodity. Firms have the motivating desires to make supernormal profits consequently are tempted to a switch to new technologies. In the same market all the firms have the perfect information about its competitors.

All goods in this market are homogenous and therefore lower the costs that the firm spent to make these goods available. In the long run the equilibrium price will always be at the of long run average cost curve of that particular firm. This implies that the company produces at the lowest output cost. At this point the consumer's grasp the opportunity that has presented as they as they benefit from the low costs which lower the prices of the goods. This implies non-existence of long run supernormal profit hence elucidates that perfect mobility exists (Marijis & Hulleman, 2008).

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Firms respond according to consumer change in the consumption if they realize that that there are changes in the prices of the commodities. This means that consumers are the determining factor on how much to be produced in the market, hence consumer sovereignty. In the short run the firms in the market provide little time for new firms to enter the market hence they make supernormal profits. Firms in this period are fixed and therefore make large profits. This can be graphically illustrated in the graph below. In the graph below the yellow rectangle represent the supernormal profit that the company makes in the short run. The marginal curve MC intersects with the average curve below the horizontal curve representing the price and the demand curve for the commodity. The final result is that the firm will make both supernormal profit and the normal zero economic profit.

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In the long run new firms enter the market making it not possible for supernormal profits to be sustained. This arrival of new firms or the expansion of the existing firms affects the profits made. The expansion of the existing companies is only possible if there exit constant return to scale. The changes in the market are that each individual firm has it curve shifting downwards. This shift will bring the prices of the commodities down (Marijis & Hulleman, 2008). The marginal revue curve and the average revenue curve will also shift downwards. The final outcome of all this changes are that the in the long run the firms will only make normal profits that is zero economic profits. These normal profits are the profits just make sufficient to say that the firm is in the industry while the supernormal profits that are not possible to be made in the long are the profits above the normal profits.

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In the above long run, the Marginal curve MC just intersects with Average curve AC just at the horizontal curve representing the demand for the commodity. All the curves intersect at above the Marginal revenue and average revenue. At this point it means that there no supernormal profits made. The market equilibrium therefore is altered to represent the new quality demanded and the price charge for each unit of the commodity. This type of market encourages the firms to who are thee produces and the consumer as they encourage the costs to reduce encouraging more customer choice (Marijis & Hulleman, 2008).

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