Firms in Competitive Markets
Why does a perfectly competitive firm maximize revenues where P=MC (Price = Marginal Cost)?
Investopedia describes a company as "perfectly competitive" as having met these 5 criteria:
1. All firms sell an identical product.
2. All firms are price takers.
3. All firms have a relatively small market share.
4. Buyers know the nature of the product being sold and the prices
charged by each firm.
5. The industry is characterized by freedom of entry and exit.
A perfectly competitive firm maximizes revenues where price equals marginal cost because the price of a product does not depend on the number of units produced and sold. The total revenue a firm brings in is in proportion to the amount of output. Each firm within this market is the price taker, not the price maker as in a monopoly.
1. All firms sell an identical product.
2. All firms are price takers.
3. All firms have a relatively small market share.
4. Buyers know the nature of the product being sold and the prices
charged by each firm.
5. The industry is characterized by freedom of entry and exit.
A perfectly competitive firm maximizes revenues where price equals marginal cost because the price of a product does not depend on the number of units produced and sold. The total revenue a firm brings in is in proportion to the amount of output. Each firm within this market is the price taker, not the price maker as in a monopoly.
Why is P=MR (Price = Marginal Revenue) in this market type?
P=MR is in this market type because, as this chapter points out, that total revenue is equal to price times quantity. So say you have a $299 product and you have 5000 units of said product. The total revenue is going to $1,495,000. If you have 1000 units the price is still going to be $299 per unit. The price has not gone up or down.
Name a business you think belongs in this category. Why?
Our book talked about the milk industry being a perfectly competitive market because sellers of milk have to be perfectly competitive because if they raise their price above what the current market is dictating then people will go buy their milk elsewhere. If they lower the price too much then they will just be losing money, they really don't have an incentive to want to drop their price. Another example would be eggs. There are many chicken farmers all selling their eggs. Once at the grocery store a consumer has a choice of buying this egg or that. They are all relatively the same price. I think one way that farmers are trying to be more competitive is to jump on the organic, free-range, hormone-free, bandwagon. Many people will pay more for what they perceive as a healthier alternative or variation.
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