Perfect Competition Essay Example | Topics and Well Written Essays - 500 words

Perfect Competition - Essay Example A firm thus has to minimize its average costs during this time to enable it stays on the market under the prevailing competition. At the equilibrium point, marginal cost, price, short-run average total cost, and long-run average cost are all equal. Therefore, a firm in perfect competition in the long-run will not find any reason to change the quantity of its output (McEachern, 2014). Outside firms will not find any incentive to enter the industry since the existing firms are not earning the economic profit. In other words, all resources employed in this industry make their opportunity costs. Suppose firms in an industry A are gaining economic profits, hence higher return than companies in another industry B in the same economy. Therefore, businesses in Industry B are undergoing economic losses because they are not getting as much as they could in industry A. Some companies in industry B will hence exit to join industry A. The process will go on until firms in both industries are getting zero economic profit. Thus, entry of companies into an industry will reduce economic profits to null in the long-run. For example, radishes price is $0.40 per pound. Mr. John’s average total cost is $0.26 per pound at an output of 6,700 pounds of radishes a month. Each unit will, therefore, bring a profit of $0,14 ($).40-$0.26). Mr. John thus gets a monthly profit of $938 ($0.40x 6,700) as shown in panel (b). Firms will enter the radish industry as long as they can make economic profits (as long as price is more than average total cost (ATC) in panel (b)), the supply curve moves r ight and the price falls. Marginal Revenue goes down to MR2 as price reduces (Cukrowski & Aksen, 2003). Mr. John will have to reduce his supply, shifting along the Marginal Cost (MC) curve to the minimum point on the ATC curve, at $ 0.22 a pound and an output of 5,000 pounds a month. Although individual firm’s output reduces as prices