Graph 1 Economics Paper

Economics 3598: Economics Writing Seminar

Keudje Pameni Gaelle Doriane

Spring Semester 2018 – Dr. Andrew Hill

Paper #1 Assignment Graph 1 depicts a firm operating in a pure or perfect competition market. Pure competition is a market structure with many firms who sell identical products. The firms in that market are price takers and cannot individually change neither the market price nor the conditions of the market. Each firm’s production has perfect substitutes sold by many other firms. Consequently, a perfectly competitive firm cannot charge for any quantity, a price greater or less than the market price. It would not charge a price higher than the market price because the buyers will prefer to purchase from one of the other firms already

A perfectly competitive firm should find the quantity to produce that will maximize its profits, minimize its loss, or both. In the short run, a perfectly competitive firm should produce at the quantity where price equals marginal cost equals marginal revenue. The firms’ output decision is to produce at the level where marginal cost equals marginal revenue because, before that point, the firms earn a revenue greater than what they lose in cost while after that point they lose in cost more than what they gained in revenue. Under perfect competition, firms are price takers and the market price is constant regardless of the quantity sold. It follows that price equals marginal revenue because the additional revenue made by selling an additional unit of output equals the price the firm charges. In the long run, there are any barriers to entry or leave the market. New firms enter massively in the market when it experiences economic profits and existing firms leave it when it experiences losses. In the long term, those entries and exits eliminate economic profits and losses by shifting the market supply at a level of output where all firms are earning zero economic profits. As a result, firms will produce at break-even point at which marginal cost equals average total cost equals the marginal

Given the easy entry and exit in the pure or perfect competition, some firms in the industry experiencing losses will leave it. As firms exit, the output of market supply is reduced, thereby prices increase allowing the remaining firms to earn a zero-economic profit. In a graph, one can represent exit of firms out of a perfectly competitive market by a supply curve shifting to the left. When the supply curve shifts to the left holding the demand for goods constant, the market price for that good increases. Because the market price has increased, the remaining firms in the market see their revenue increase as well. The revenue of those firms will increase until they reach the break-even point. At the break-even point, the economic profits or losses are zero and the firms stop exiting the