Energy Engineering - Energy Economics

Questions on pure competition - solutions

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Questions on pure competition Open Questions • For a firm in a pure competitive market, the marginal revenue MR is equal to price, why? The demand curve for a firm in a pure competitive market is a horizontal line at the market price (i.e. the price is the same for every unit sold ) The marginal revenue received by the firm is the change in total revenue from selling one more unit , which is the constant market price Open Questions • Why is a firm in pure competition a price taker? 1. One firm’s output is a perfect substitute for another firm’s output 2. Each firm serves a tiny share of the market These points imply that each firm cannot unilaterally influence the market price at which it can sell its good or service. Firms must accept , or “take” the market equilibrium price Open Questions • In pure competition, what is the elasticity of the demand for the firm’s output? Since no single firm in this market can influence the price at which it sells its output, the firm faces a perfectly elastic demand (i.e. if the firm increase the price to p ’> p equilibrium the firm will sell 0 units of the product ) Open Questions • What triggers entry in a competitive market? Describe the process that ends further entry If firms in a competitive market make an economic profit, other firms will enter the market. As the other firms enter , the supply increases and the price falls . The fall in the price eventually eliminates the economic profit, at which time entry stops . REASONING QUESTIONS • In a pure competitive market, it is experienced a permanent decrease in demand. What happens to output, price, and economic profit Let’s assume to move from a long term equilibrium → ������ =0, thus p=AC p AC MC q p,c Q p S D p Q q D’ q p S D p p’ p AC MC q p,c p’ Negative profit, p