If supernormal profits are made new firms will be attracted into the industry causing prices to fall. What happens if supernormal profits are made? In the long run firms will make normal profits.The individual firm will maximise output where MR = MC at Q1.The industry price is determined by the interaction of Supply and Demand, leading to a price of Pe.There is perfect information and knowledge.All firms are price takers, therefore the firm’s demand curve is perfectly elastic.All firms produce an identical or homogeneous product.Freedom of entry and exit this will require low sunk costs.Because there is freedom of entry and exit and perfect information, firms will make normal profits and prices will be kept low by competitive pressures. Perfect competition is a market structure where many firms offer a homogeneous product.
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