Assignment Ii Case Study Perfect Competitive Market Model

1997 words - 8 pages

A firm is the smallest unit of production, the objective of its performance is to maximize the economic profits which can be achieved by minimizing cost of production or maximizing the total revenue. The prospects of profit for a firm are further guided by market conditions. In a market where a firm has to sell its output there may be competitive, monopolistic or oligopolistic conditions. Each market type has a different impact on the price and quantity sold by the firm. My paper focuses on the perfectly competitive type only; the reason lies in that it is the easiest of the market structure models to start out with. This paper first looks at some high points that running through this model, and then uses the covered principles and ideas to explain the impact of satellite tracking system on the economic performance of a typical firm of American trucking industry.Main assumptions of PCMMPerfect competitive market model contains the following four main assumptions.1) A large number of buyers and sellers, each acting independently, they are too small to influence the market. This means that each firm has only a small market share of total supply and takes the price of the product as beyond its control. It is therefore a price-taker.2) The market produces a homogenous or standardized product where the consumers cannot distinguish between products produced by different firms.3) Market participants have full knowledge of the economic and technical data relevant to their decision- making.4). There is free entry and exit of firms in response to profits in the industry. Thus if firms are making positive economic profits, it acts as a signal to others to open up similar firms producing similar products. If firms are losing money, making negative economic profits, then, firms will drop out of the industry.Main Features of PCMM1. 1 Demand and supply curveIn the assumptions given above, we know that perfectly competitive firms act as price takers. So irregardless of how much the firm sells, it has no ability to charge a price other than the market price, so on a graph, with price (P) on the vertical axis and quantity (Q) on the horizontal axis, the demand curve faced by a perfect competitive firm is horizontal, parallel to the horizontal axis or is perfectly elastic. See figure 2.1. Therefore, we conclude that the demand curve is equal to price and equal to average revenue, and equal to marginal revenue.Figure 2.2 shows how a competitive firm responds to changes in the price. Suppose the price drops to C1, the firm produces the output Q1, which is the quantity that equals marginal cost to the price. When the price increases to C2, the firm finds that marginal revenue is higher than marginal cost at the previous level of output, so the firm increases production to Q2. In this sense, the marginal cost curve determines how much the firm is willing to supply at given price, and in essence becomes the supply curve.2. 1 Competitive Equilibrium (MR = MC...

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