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Explain Why You, as Manager of a Firm in a Perfectly Competitive Firm, Would Have No Discretion in Setting Prices of Your Product

In: Business and Management

Submitted By ayiku
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ECONOMICS INDIVIDUAL ASSIGNMENT

QUESTION

Explain why you, as manager of a firm in a perfectly competitive firm, would have no discretion in setting prices of your product

ANSWER

Perfect competition demands very strict assumptions that are unlikely to be found in many if any markets in the real world. Markets that most closely equate to perfectly competitive ones are those in which there are very large numbers of buyers and suppliers, reasonably free entry and exit from the market and well informed consumers. It is in such markets that the purchase decision is driven by price.

A perfect competitive (price taker) market exists when the following conditions occur:

• Low entry and exit barriers - there are no restraints on firms entering or exiting the market

• Homogeneity of products - buyers can purchase the good from any seller and receive the same good • Perfect knowledge about product quality, price, and cost • No single buyer or seller is large enough to influence the market price
Managers must take the existing market price; if they set a price above the market price, no one will buy their product because potential buyers simply will go to other suppliers. Setting a price below the market price does not make any sense because the firm can sell as much as it wants to at the market price; selling below the market price will just reduce profits.

Because Managers must take the current market price a purely competitive market is also called a "price takers" market.

The firm can sell as much as it can produce at the existing market price, so demand is not a constraint for the firm. Revenue will be simply the market price multiplied by quantity produced.

Perfect competition Short run-equilibrium diagram

• The firm is a price-taker, not a...

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