Question

4. Briefly explain the nature of a perfectly competitive firm. Briefly discuss the effects of new entrants into a perfectly competitive market on existing firms that have profits in the short run. (include equations if any)

Answer 1

A perfectly competetive firm in the market will be producing at the point where the MC=MR=ATC = P. there is free entry and exit in the market, and all the firm in the market will sell homogenous goods.

if the firm is making a profit in the short run and more firms come in, then that will increase the supply and lower price in the market, this will reduce the firms profit in the market. This fall in the price will continue to the point where there is no more profit and firm is in the long run.