Why does perfectly competitive firm not charge a price below the market price?
The assumptions of the model of perfect competition ensure that every decision maker is a price taker—the interaction of demand and supply in the market determines price. Although most firms in real markets have some control over their prices, the model of perfect competition suggests how changes in demand or in production cost will affect price and output in a wide range of real-world cases. Show
A firm in perfect competition maximizes profit in the short run by producing an output level at which marginal revenue equals marginal cost, provided marginal revenue is at least as great as the minimum value of average variable cost. For a perfectly competitive firm, marginal revenue equals price and average revenue. This implies that the firm’s marginal cost curve is its short-run supply curve for values greater than average variable cost. If price drops below average variable cost, the firm shuts down. If firms in an industry are earning economic profit, entry by new firms will drive price down until economic profit achieves its long-run equilibrium value of zero. If firms are suffering economic losses, exit by existing firms will continue until price rises to eliminate the losses and economic profits are zero. A long-run equilibrium may be changed by a change in demand or in production cost, which would affect supply. The adjustment to the change in the short run is likely to result in economic profits or losses; these will be eliminated in the long run by entry or by exit. Concept Problems
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ReferencesBuckley, W. F., “Carey Took on ‘Greed’ as His Battle Cry,” The Gazette, 22 August 1997, News 7 (a Universal Press Syndicate column). Why a firm under perfect competition will not lower the price?(ii) An individual firm under perfect competition is such a small supplier in the market that by lowering the price, it cannot fulfill the entire market demand for the commodity. Accordingly,the policy of capturing market by lowering the price will fail.
Why can't a firm in a perfectly competitive industry charge a price above the market price?Because buyers have complete information and because we assume each firm's product is identical to that of its rivals, firms are unable to charge a price higher than the market price.
Why does a perfectly competitive firm not charge a price above the market price Why does it not charge a price below the market price?Because the buyers have perfect substitutes of the product at a market price that is lower than the price charged.
Why is price determination not possible under perfect market conditions?Industry Demand and Supply Under Perfect Competition
In such a situation no firm enjoys any power to determine its own price. The price of the commodity is determined at the level of the industry through the interaction of the forces of demand and supply of the commodity in the market.
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