question_answer

Explain the implication of 'freedom of entry exit to Ae firms' under perfect competition.

Or

Explain the implication of 'perfect knowledge about market' under perfect competition.

 

Answer:

The basic implication of the feature of freedom, of entry and exit of the firms under perfect competition is that all firms in the market earn normal profit in the long run. Each individual firm is able to operate at the point where the minimum of long run average cost curve (LAC) is tangent to the price line. Tills implies that the firm neither earns super normal profits nor suffers losses.

If, the firms are earning super normal profits that is, the price is greater than the minimum of LAC then, it attracts new firms in the market. Consequently, the total output in. the industry increases and the price falls. Price continues to fall till it becomes equal to the minimum of the LAC curve and the super-normal profits are wiped out. As against this, if the firms are suffering losses (that is, the price is less than the minimum of.L4Q then, it leads some of the firms to exit the market. Consequently, the total output in the industry falls and the price rises. Price continues to rise till it becomes equal to the minimum of the LAC curve and the losses are wiped out. Thus, freedom of entry and exit of firms under perfect competition implies that all firms earn only normal profits in the long run.

Or

The implication of perfect knowledge about market under perfect competition is that no seller can either sell their products at higher prices or at lower prices than the market price. Perfect knowledge implies that both buyers as well as the sellers are fully aware of the conditions prevailing in the market. That is, the buyers are fully aware of the prevailing market price of the product at different places and the sellers are also aware of at what prices are the buyers willing to buy the product. Thus, if any individual firm is charging higher (or lower) price for the homogeneous product, then the buyers will shift their purchase to the seller (or shift their purchase from other seller to the firm selling at lower price). Hence, no firm can either sell their products at a price that is higher or lower than the market price.