Eco111 Asignment 3 Why Is a Firm in a Perfectly Competitive Market Said to Be a “ Price Taker” ?

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NAME                   : LÂM TRUNG HIẾU

CLASS                  :  BA0664

STUDENT CODE:  BA60104

SUBJECT              : BASIC MICROECONOMICS

Question 1:

Why is a firm in a perfectly competitive market said to be a “ price taker” ?

Answer:

A perfect competitive market (competitive market) is a market with many buyers and seller trading identical products so that buyer and seller is a price taker. In a comprehensively developing market, there are a lot of buyers and sellers .In perfectly competitive market, the goods offered for sale are all exactly the same, and the buyers and sellers are so numerous that no single buyer or seller has any influence over the market price .If a company in a competitive market sell a goods with higher than market price, the buyer don’t buy goods .And sales volume will drop down to zero..If a company sell goods with lower market price,a company won’t have profit. In perfectly competitive market, the goods offered for sale are all exactly the same, and the buyers and sellers are so numerous that no single buyer or seller has any influence over the market price. Moreover, all of buyer and seller are small part in comparison with surroundings (market’s change),and certainly is goods’ price decided by the market. The buyers and sellers are called like “Price taker”. They cannot choose the price they want, and the market will give them the price for buying and selling.

Question 2:

A perfectly competitive firm producing X has the following monthly cost data. (Q = total output, AVC = average variable cost), fixed cost is 100.

1. Calculate TC, ATC, AFC, MC in number.
2. Assuming that the market price is 40/unit, your predict this firm’s decision. Explain.

Answer:

 a. Finding TC, ATC, AFC, MC by using some structures bellows:

TC = VC + FC

ATC = TC Q[pic 2]

AFC = FC  Q[pic 3]

MC = [pic 4]

Profit = Price  Quantity TC[pic 5][pic 6]

(TC: Total cost; ATC: Average Total cost;

AFC: Average Fixed Cost; MC: Marginal Cost)

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b) [pic 8]

        We can see on the table, it is clear to see that MAX Profit is equal to -50 and MIN AVC is nearly equal to 30. Although the profit is -50 is below zero, but AVC  is equal to 30 which is smaller than price (40 per unit). Thus, we will continue to produce goods.