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Perfect Competition (Firms Reaction (When the price is equal to the…
Perfect Competition
Firms Reaction
When the price is equal to the minimum average variable cost, then the firm will be indifferent between producing at a loss or not producing
When price is below the average variable costs, the firm will shut down
When the price equals the minimum average total cost, the firm makes normal profit.
When price is greater than the average total cost, then the firm makes supernormal profit.
If the average total cost is greater thna the price but the price is greater thna the average variable costs, then the firm makes loss but continues to produce.
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Limitations
This is bad for the companies because they can easily be replaced by any of the other firms that they are competing with. their prices are incredibly elastic so they will suffer from any increase in price.
Since everybody provides the same, it is likely that a person who is in a more convenient location will receive more sales regardless of their prices. They can charge a dollar more than another person and will still have more demand than other sellers.
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