Competitive Market Worksheet: Single Firm In A Competitive M

Competitive Market Worksheeta Single Firm In A Competitive Marketp

Competitive Market Worksheet: A single firm in a competitive market. ( Price or Cost ) ( Price or Cost $ ) Count’s costs Market Supply and Demand ( MC ) ( ATC ) ( ( m arket ) supply ) ( Demand ) ( quantity ( 1,000 calculators/wk) QUANTITY (1,000 calculators /week) ) The graph on the left shows the cost curves for Count, a company that produces calculators. The graph on the right shows Supply and Demand for the calculator market, which we will assume is competitive. Part A: Short Run Assume that the market is competitive and in short run equilibrium and that Count is making profit-maximizing short run decisions. 1. What is the current market price? $ __ 35 ____ How many calculators are being produced per week in this market ? ____ 130 _____ 2. What price will Count charge? _______ Why will Count charge this price? ___________________________________ 3. What is Count’s: Output (q): ________ At that output, what is MC ________ and ATC _________? Average profit per unit: $ ___________. (Note: If it is a loss, state it as a negative profit) Part B Long Run 1. If other producers have the same costs as Count , and are making the same profits/losses as count is in question #4, what will happen to each of the following in the market in the long run : Will firms enter or exit ______________________ Shift(s) in supply or demand ________________________________ Change in the price________________________. Change in the profits (losses) of firms. _______________________ 2. Once the market has reached long-run equilibrium , what is the expected market price? $_____________ Explain why:______________________________________________________________________________ 3. In long run equilibrium, all firms’ Marginal Cost will be = $ _____, since MC =_ price _MR______ ; all firms’ ATC will be $______ , since ATC in long run = _ Marginal Cost __ Each firm’s economic profit per unit = $ __________ 4. What is the test or condition for productive efficiency? (A firm is producing efficiently if : it is producing at the minimum AC ) Explain why a competitive market will achieve productive efficiency in the long run. Because the market price will always be competed down to the minimum ATC.

Paper For Above instruction

Economics provides a structured analysis of markets, particularly focusing on the dynamics within perfectly competitive markets. The worksheet in question investigates the operational equilibrium of a single firm, Count, in a competitive calculator market, providing a comprehensive exercise on short-run and long-run market behaviors, profit maximization, and efficiency considerations.

Understanding Short-Run Equilibrium

In the short run, a firm like Count maximizes profit where marginal cost (MC) equals the market price. Given the current market price of $35 and the firm’s output level of 130 calculators per week, we can interpret that Count’s marginal cost at this activity level also equals $35. This is because, under perfect competition, profit maximization occurs when price equals marginal cost. The firm’s decision to produce 130 units indicates that at this quantity, the marginal cost curve intersects the price line at $35, confirming its profit-maximizing point.

Count charges a price equal to the market equilibrium to remain competitive. Since the market is competitive, the firm is a price taker, and the price is set by the intersection of supply and demand in the market graph. This price reflects the market’s current supply and demand conditions, leading to the calculated equilibrium at a specific quantity, which in this case is 130 calculators per week.

The firm’s average total cost (ATC) at this output determines profitability. If the ATC at 130 units is below $35, the firm makes a profit; if it’s above, it incurs losses. The profit per unit is found by subtracting ATC from the market price, multiplied by output quantity. If the firm is profitable, it earns a positive profit per unit; if not, a negative value indicates a loss.

Long-Run Adjustments and Equilibrium

In the long run, the competitive market adjusts to ensure that firms earn zero economic profit, which occurs when price equals the minimum point on ATC. If all firms have identical cost structures and are earning profits or losses, market entry or exit occurs. Profits attract new entrants, shifting supply rightward, reducing the market price until profits are eliminated. Conversely, losses cause firms to exit, shifting supply leftward and elevating prices to the point where remaining firms break even.

When equilibrium is re-established in the long run, all firms produce at their minimum ATC, where their marginal cost (MC) equals the market price, now also equal to the minimum ATC. Therefore, the representative firm’s marginal cost and average total cost are equal at this point. The economic profit per unit tends to zero, indicating no incentives for further entry or exit. This state exemplifies productive efficiency, where resources are allocated optimally.

Efficiency Conditions

The key condition for productive efficiency is that firms operate where the ATC is minimized. Since, in perfect competition, the market price is driven to this minimum point in the long run, the entire market achieves productive efficiency. This secures optimal resource allocation, with no waste occurring in production processes. The market naturally enforces this condition due to firms’ profit-maximizing behavior and free entry and exit, ensuring no firm produces at a level where costs could be reduced further without incurring losses.

Conclusion

Overall, the worksheet emphasizes fundamental economic principles such as the forces of supply and demand, entry and exit of firms, and efficiency in resource use. The long-run equilibrium condition where price equals the minimum ATC is significant because it guarantees both allocative and productive efficiency, ensuring the most efficient use of society’s resources within a perfectly competitive framework. This understanding underscores the importance of competition in promoting efficiency and optimal market outcomes.

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