Economics For Managers
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Chapter 6 : Perfect Competition
Characteristics Of A Perfectly
Competitive Market
Supply And Demand In Perfect Competition
Short Run Equilibrium Of The Competitive Firm
Long Run Equilibrium Of The Competitive Firm
Efficiency Of Competitive Markets
Long Run Competitive Equilibrium and Allocative
Efficiency
Efficient Output of a Good
Efficiency in Competitive Markets
Effect Of Taxes On Price And Outputs
Imposition of a Lump Sum Tax
Imposition of a Profit Tax
Imposition of a Specific Sales Tax
Chapter Summary
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In perfect competition, there is large number of buyers and
sellers, products are homogeneous, there are no barriers to enter and exit,
buyers and sellers have perfect knowledge about the market conditions and there
is perfect mobility of resources and the absence of transportation cost.
Supply and demand forces determine the price of a commodity. Short run
equilibrium of a firm is based on the total revenue and total cost, and marginal
revenue and marginal cost.
Firms in an industry try to maximize their profits by adjusting the output to a
level where MC=MR. Long run equilibrium plays a crucial role in deciding the
existence of the firm. Profits earned by the firms would attract others to enter
the industry and with the entry of new firms there will be a shift in the
short-run industry supply curve to the right until it intersects with the market
demand curve at the price at which all firms make zero economic profits. |
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It is then that the industry will be in
equilibrium. To fulfil the marginal conditions of allocative efficiency, three
properties are observed in a freely competitive market mechanism:
efficient allocation of resources among firms; efficient
distribution of goods produced between consumers; and efficient
combination of products. In competitive markets, prices equal the
marginal benefits and marginal cost of goods.
Taxes such as a lump sum tax, a profit tax, or a specific tax, will
have an effect on price and output. Imposition of a lump sum tax
will not affect the firm and industry in the short run. However it
will effect the firm and industry in the long run. Imposition of a
profit tax will also effect the firm and industry in the long run.
The lesser the proportion of specific tag the firm bears, the more
will be the burden of the consumer.
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