Question

State the assumptions of perfect competition and their implications. Discuss why competition is beautiful. Also, state why a losing a firm should stay in business for a while and when it must shut down.

Answer 1

The assumptions of a perfectly competitive market is that

1) the goods are identical to each other

2) there are many number of buyers and sellers in the market

3) there is perfect information existing with that of sellers and buyers

4) the price is constant throughout with which the demand curve is horizontal

it can be mentioned that it is always better to have a perfect competition because it will have very less exploitation or in other words the efficiency is maximum rather than all the other market structures because there is perfect information available with that of consumers and producers on the whole. Even when a firm is using in the short run it can continue in the business if the average variable cost is less than the price because under the circumstances the variable cost is at least recovered and if the price is less than average variable cost it should shut down on the whole