Question

Draw a perfectly competitive market model in equilibrium, showing both firm-level and market-level graphs. Label each...

Draw a perfectly competitive market model in equilibrium, showing both firm-level and market-level graphs. Label each axis and curve, then answer the following questions.

  1. What determines the price of a product in this market?
  2. How does a firm choose the quantity they will produce?
  3. What happens in this market when firms are profitable?
  4. What happens in this market when firms are loosing money?
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Answer #1

Below is a perfectly competitive market model in equilibrium.

  1. Market forces of demand DD and supply SS determine the price P0 of a product in this market. Demand curve and supply curve meet at E which is the market equilibrium that determines the price P0 and quantity Q0.
  2. A firm uses its marginal cost function to choose the quantity it will produce. This implies that firm follows P = MC rule. However P > AVC for firm to continue production
  3. New firms enter in the long run in this market when firms are profitable because new firms desire to earn profits
  4. Existing firms start leaving this market when firms are loosing money because they can turn their losses into zero when they leave the market

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