Business

The Perfectly Competitive Firm

A market is said to be perfectly competitive when the number of buyers is so enormous, that many small firms are required to participate in the market in order to meet these buyers’ demands. Because both the firms and the buyers are small enough to influence the price, both buyers and sellers can only take the market price of goods as to where to base their transactions. Any deviation from the market price will bring the firm back to the market price in a perfectly competitive situation.When a firm raises its price beyond the market price, selling a product the same as what the other players in the industry are selling, the buyer has no incentive to buy in that firm because he or she has many options from where to buy those products. This does not give any firm in a perfectly competitive market any advantage to increase the price they offer. therefore they accept the price in order to maximize their profits. Hence, these firms in a perfectly competitive market are called price-takers.In a perfectly competitive market, variable costs are a vital part of determining the company’s survival. Because a firm competes in a market where the price cannot be determined by any single firm as it is small enough to influence it, when the market price goes down and puts firms into losses, the firm in the short-run still has an incentive to continue on its operations rather than to completely shut down its business.Firm’s costs are classified according to variable costs and fixed costs—variable, in the sense that a cost’s behavior is consistent with sales, and fixed in the sense that any level of sales will not be able to affect it given a certain range. When a firm’s revenue still produces enough to cover the amount of fixed costs for a certain level of price, the fixed costs is still smaller than what costs the firm when it shuts down. When the market price falls below the firm’s ability to support its fixed costs, only then will it givefirm the incentive to shut down its operations.

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