Running Head: PERFECTLY COMPETITIVE MARKETPerfect competitionNameInstitutional Affiliation1PERFECTLY COMPETITIVE MARKET2Perfect competitionA firm, which is operating in a perfectly competitive market, can generate economicprofit in short-run, but this is not possible in the long run. Perfect competitive market structure isa market with a large number of sellers and buyers and absence of barriers, which make it easyfor firm entry and exit. Along with having undifferentiated products, buyers, and sellers haveperfect information on goods and there is no transaction cost.To maximize profits, firms equates their marginal revenue to marginal cost (MR=MC).Marginal revenue is the gradient of revenue curve. In the short run, the economic profit can benegative, zero or positive. If the price is high compared to the average total cost, the firm makesa profit, but if the price is low compared to average total cost, the company will be making a loss(Rafay & Gilani, 2016).Perfect competition in short-runPriceMCAVCpcD=AV=MRcost of production(including normal profit)QuantityEconomic profitPERFECTLY COMPETITIVE MARKET3In the long run, when the firms operating in a perfectly competitive market start makingpositive economic profits, the market becomes more lucrative. The positive economic profit actsas an incentive to the new firms influencing them to join the market. The increase in the numberof the firms operating in the market increases the sup ...
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