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Diana Gutierrez - Perfectly Competitive Market (assumptions (large number…
Diana Gutierrez - Perfectly Competitive Market
assumptions
large number of firms
all firms produce identical products
free entry and exit
perfect information
breaking even
where price is equal to average total cost. breakeven output is a production level that achieves zero economic profit. In other words, a firm is just "breaking even."
shutting down
in the short run a firm will produce as long as price per unit > or equal to average variable cost (AR = AVC)
profit maximization
uses the marginal revenue and marginal cost rule to maximize profit (or minimize loss)
sunk costs
Sunk costs cannot be recovered if a business decides to leave an industry.
normal and supernormal profit
Normal Profit = P =ATC
Supernormal Profit = P > ATC
Supernormal profit: profit of a firm over and above what provides its owners with a normal (market equilibrium) return to capital.
Normal profit: in turn is defined as opportunity cost of the owner's resources.
examples
agricultural markets
limitations of perfect competition
Disadvantage: Little : barriers
Advantage: consumer exploitation is low
Disadvantage: no incentive to innovate
Disadvantage: Consumer orientated