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Why does a purely competitive firm not charge price above the market price? Why does it...

Why does a purely competitive firm not charge price above the market price?

Why does it not charge a price below the market price?

Graphs are required for both questions.

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Answer #1

The purely competitive market refers the market structure where price is decided by the demand and the supply forces.

The firm can not charge the price which is above the market price. If the firm charges the price which is above the market price, then it will lose all its sale as the buyers are fully aware of such market price.

On other side, firm can not charge the price lower than the market price either. It will suffer the loss. It can sell all products at the higher price, then here selling at lower price does not make sense.

Following is the diagram:

In the above diagram, the demand will fall to zero if price set by the firm is above the P, on other hand, price below the P will fetch the losses to firm.

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