U25292: ECONOMICS

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Table of Contents
Introduction......................................................................................................................................3

Concept of perfect competition and characteristics.........................................................................4

A perfectly competitive firm determines its best level of output in both the short-run and long-
run....................................................................................................................................................5

Conclusion.......................................................................................................................................7

Reference.........................................................................................................................................8

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Introduction

Divide a company's total earnings by the number of units sold to calculate its average revenue.
To calculate the change in marginal revenue, divide the variance revenue by the change in
quantity. The objective of any business functioning in a competitive market is to maximize
profits. In the short term, an organization's economic earnings may be positive, negative, or zero.
Perfect competition is a complex condition that would be discussed further in the papers main
body. The characteristics along with firms short- and long-term policies will be analysed in the
second part of the paper.

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Concept of perfect competition and characteristics

There have been no transaction costs, no barriers to entry or exit, and perfect information about
the cost of a product in an entirely competitive market. In a completely competitive market, a
firm's total revenue (TR = P * Q) equals the sum of its prices and sales (Stigler, 1957). Profit
maximization is a primary objective of any business functioning in a competitive market. In the
short term, a company's economic earnings may be positive, negative, or zero. There'll be no
economic gains in the long run.

There must be no transportation costs. The entire market will benefit from preserving price
consistency if transportation costs are kept to a minimum or non-existent. There is only one price
for a commodity in the market at any given time (Khan, 1989). Buyer-Seller Relationships That
Are Independent. In the market, there should be no relationship between vendors and buyers.
When it comes to understanding the price of the commodity, the seller should not use the pick
and choose the technique. If one looks at it from the end, he will discover that "Perfect
Competition" is a myth in real life.

Price-taking businesses have a limited market capacity. Due to the high number of companies
providing the same product on the market, each company controls a relatively small portion of
the total market, which means that each company cannot set its own price (Azevedo and
Gottlieb, 2017). All businesses sell their products at the exact price determined by market forces
such as supply and demand. Firms are called "price takers" rather than "price setters" because
their prices are determined by the market. As many price-taking firms as there are in the market,
each with a relatively small market share demonstrates that in a perfect competition environment,
no single firm has the power to set its own price for the product it wishes to sell.

Buyers are well-informed about the products being sold by businesses. As a result, consumers
are well-informed about how products are manufactured, what features they contain, and how
much their competitors charge for their products (Cocioc, 2000). In a completely competitive

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market, it's indeed impossible for a business to make false accusations about the advantages of its
product, as the consumer would immediately recognize the deception.
Businesses can enter and exit the marketplace with relative ease. Any factor that makes it more
difficult for a new enterprise to enter a market is considered a barrier. The following are the most
frequently encountered impediments to market entry: The state regulates. In many areas, such as
utility, the government strictly regulates the number of enterprises that can join a market
(Helmberger, 1964).
Further, when a product is patent-protected, competitors are prevented from entering the market
and competing.

A perfectly competitive firm determines its best level of output in both the
short-run and long-run

For a better understanding of why this is the case, look at a slightly different way to define profit:

Profit Total Revenue−Total cost

(Price) (Quantity produced) − (Average cost) (Quantity produced)

It's impossible when a perfectly competitive firm, which must accept the market price for its
output, to set its own price. Because this is already accounted for in the profit equation, a firm
that is perfectly competitive can outflow an unlimited number of units at the same price.

A perfectly competitive firm can determine the amount of output that will generate the most
profit based on its total revenue (Mayer, 1974). Profit, regardless of number, is the differential
above total revenue and total costs. If anyone wants to figure out the most profitable amount to
produce, he or she can look at the amount of revenue that exceeds the amount of cost.

The total money generated by each unit sold would grow if the price were raised. Every time a
unit is sold, a lower price means a lower profit. In other words, if total costs exceed total

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revenues at any level of output, What happens if the price is reduced sufficiently to bring the
number revenue curve below the whole cost curve? In this situation, a business's only alternative
is to incur losses. A profit-maximizing firm prefers the amount of output that minimizes losses
and maximizes revenues.

Numerous firms lack the data essential to develop an exhaustive total cost curve that considers
all aspects of processing (Sandmo, 1971). Because they haven't tried it, they have no idea what
the total costs would be if production were to be doubled or halved. Instead, companies try new
things.

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Conclusion

Profit maximization is the goal of each business operating in a competitive market. The
economic earnings of an organization may be positive, negative, or zero in the short term.
Economic gains will not accrue over time. Perfect competition is a complicated concept that has
been discussed in the main body of the paper. The second section of the study has analysed the
features of firms as well as their short- and long-term policies.

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Reference

Azevedo, E.M. and Gottlieb, D., 2017. Perfect competition in markets with adverse
selection. Econometrica, 85(1), pp.67-105.
Cocioc, P., 2000. Foundations of a revisited concept of perfect competition.
Helmberger, P.G., 1964. Cooperative enterprise as a structural dimension of farm
markets. American Journal of Agricultural Economics, 46(3), pp.603-617.
Khan, M.A., 1989. Perfect competition. In General Equilibrium (pp. 238-243). Palgrave
Macmillan, London. Markham, J.W., 1950. An alternative approach to the concept of workable
competition. The American Economic Review, 40(3), pp.349-361.
Mayer, W., 1974. Short-run and long-run equilibrium for a small open economy. Journal of
Political Economy, 82(5), pp.955-967.
Sandmo, A., 1971. On the theory of the competitive firm under price uncertainty. The American
Economic Review, 61(1), pp.65-73.
Stigler, G.J., 1957. Perfect competition, historically contemplated. Journal of political
economy, 65(1), pp.1-17.