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Perfectly Competitive Markets (Assumptions (-Large number of firms, -All…
Perfectly Competitive Markets
Assumptions
-Large number of firms
-All firms produce identical products
Assumptions of perfect competition:
-Free entry and exit
A firm will often make assumptions about what the economic environment will be like during a certain time, in order to predict how this will affect or influence their business
-Perfect information
Profit
Maximization
The general rule is that the firm maximizes profit by producing that quantity of output where marginal revenue equals marginal cost
Normal and
Supernormal Profit
super normal profit is profit of a firm over and above what provides its owner with a normal return to a capital
Normal profit is minimum level of economic profit a company needs to stay in business.
Shutting down
a firm will choose to implement a shutdown of production when the revenue received from the sale of the goods or services produced cannot even cover the fixed costs of production.
Limitations of perfect competition
there are very little barriers to entry implying that any firm can enter the market and start selling the product
there is no incentive for sellers to innovate or add more features to the product
Breaking even
In economics and business, specifically cost accounting, the break-even point at which cost or expenses and revenue are equal:
Sunk Cost
For example, a business may have invested a million dollars into new hardware
A sunk cost is a cost that has already been incurred and cannot be recovered. They are excluded from future business decisions because the cost will be the same regardless of the outcome of a decision