Quiz 13: Firms in Competitive Markets


Perfect competition: Perfect competition refers to a market structure with the features of more number of sellers and buyers in the market. The firms in perfect competition market sell homogenous products. Price of the product is determined by the market according to the quantity demanded and supplied; an individual firm cannot influence the market price. Hence, option 'c' is correct.

(a) The market of boat is given. The rise in the price of crude oil will increase the average total cost and the average variable cost in the short run. The graph of the cost curves is shown below. img From the above graph, there is an upward shift in SATC to SATC 1 , and SAVC to SAVC 1 , due to a rise in the crude oil price. The market supply declines due to an increase in the SATC from S to img . (b) The profit of boat-makers will fall in the short run because of a rise in SATC. In the long run, the number of boat-makers will decrease as they have less profit. The number of boat-makers will decrease in the long run. As a result, the price will increase from OP to OP'.

A competitive firm is small, relative to the market in which it operates. Therefore, it has no power to influence the price of its output. It takes the price as given by market conditions. Competitive firms are price-takers. They can sell as much or as little as they want at this price. Thus, the competitive firm faces a horizontal demand curve. Because a competitive firm sells a product with many perfect substitutes (the product of all the other firms in its market), the demand curve that any one firm faces is perfectly elastic.