Economics Assignment

Running head: ECONOMICS ASSIGNMENT
Economics Assignment
Name of the Student
Name of the University
Author Note

1ECONOMICS ASSIGNMENT
Table of Contents
Answer 1:...................................................................................................................................2
a..............................................................................................................................................2
b..............................................................................................................................................3
Answer 2:...................................................................................................................................4
a..............................................................................................................................................4
b..............................................................................................................................................5
Answer 3:...................................................................................................................................7
a..............................................................................................................................................7
b..............................................................................................................................................7
c..............................................................................................................................................8
d..............................................................................................................................................9
Answer 4..................................................................................................................................10
a............................................................................................................................................10
b............................................................................................................................................10
References:...............................................................................................................................11

2ECONOMICS ASSIGNMENT
S
D
D1
Price Price
P
O
Output Output
Market Price taker firm
Q
Answer 1:
a.
Firms, in a market of perfect competition, are price taker as they cannot change the
price of products. This happens as each firm possesses a very small portion of the entire
market. The number of firms is very large as new one can enter into the market easily without
any restriction. Moreover, existing firms can also exit from the market if they incur loss
(Bhattacharya, Robotis & Van Wassenhove, 2019). Based on the characteristics of a perfectly
competitive market, each firm as well as buyer has perfect knowledge regarding the price and
corresponding amount of output, selling in market. Therefore, a small change in price by a
firm can influence other firms to change their prices accordingly. Therefore, no firm intends
to change price level (Cowell, 2018). As a result, the market receives a stable condition
where no firm can change price as per its requirement. This price taking condition can be
described with the help of following diagram.

3ECONOMICS ASSIGNMENT
Output
AC
E
Market Firm
Price Price
O
Output
P0
P1
C
Q1Q0
D
S1
S2
MC
MR1
MR0
Figure 1: Price taking condition in a perfectly competitive market
In figure 1, S represents the market supply curve considering all existing firms while
D represents the market demand curve. Both curves intersect with each other and from this an
equilibrium price as well as output has been generated. This price cannot be changed in
market and consequently they have achieved this price to set the individual demand curve. As
a result, the demand curve of every firm looks like a horizontal straight line.
b.
In a perfectly competitive market, one firm can incur loss or earn economic profit
during short-run. However, firms earn only normal profit during long-run. This phenomenon
can be described with the help of some features of this type of market. The entry and exist in
this market is not restricted. Therefore, new firms can enter into this market if the existing
firms enjoy economic profits during short-run (Currie, Peel & Peters, 2016). On the other
side, existing firms have flexibility to leave the market if they incur loss during short-run.
Therefore, short-run conditions of these firms lead a perfectly competitive market to
experience normal profit during long-run.