Assume that a firm in a perfectly competitive industry faces a prevailing market price of $75 and has the following total cost schedule: Quantity: 0, 20, 40, 60, 80, 100, 120, 130, 140 TC: 300, 700, 1000, 1900, 2900, 4400, 6900, 10000, 15000 TR: 0, 1500, 3000, 4500, 6000, 7500, 9000, 9750, 10500 Profit/Loss: -300, 800, 2000, 2600, 3100, 3100, 2100, -250, -4500 MC: -, 20, 15, 45, 50, 75, 125, 310, 500 MR: 75, 75, 75, 75, 75, 75, 75, 75, 75 Given the circumstance in question 3c) if new firms were attracted to this market, what would be the main consequence for this competitive firm in terms of prices received; quantity produced and profit?
Question
Assume that a firm in a perfectly competitive industry faces a prevailing market price of $75 and has the following total cost schedule: Quantity: 0, 20, 40, 60, 80, 100, 120, 130, 140 TC: 300, 700, 1000, 1900, 2900, 4400, 6900, 10000, 15000 TR: 0, 1500, 3000, 4500, 6000, 7500, 9000, 9750, 10500 Profit/Loss: -300, 800, 2000, 2600, 3100, 3100, 2100, -250, -4500 MC: -, 20, 15, 45, 50, 75, 125, 310, 500 MR: 75, 75, 75, 75, 75, 75, 75, 75, 75
Given the circumstance in question 3c) if new firms were attracted to this market, what would be the main consequence for this competitive firm in terms of prices received; quantity produced and profit?
Solution
In a perfectly competitive market, when new firms enter the industry, the supply in the market increases. This increase in supply leads to a decrease in the market price. As a result, the price received by the existing firms, including this firm, would decrease from the prevailing market price of $75.
The decrease in price would also affect the quantity produced by the firm. The firm would adjust its production to the point where the marginal cost (MC) is equal to the new, lower market price. If the new market price is lower than the minimum point of the firm's average total cost (ATC), the firm would reduce its quantity produced.
The decrease in price and quantity produced would lead to a decrease in the firm's total revenue (TR). Since the total cost (TC) would not decrease as much (because of the presence of fixed costs), the firm's profit would decrease. If the new market price is lower than the minimum point of the firm's ATC, the firm would incur a loss.
In summary, the entry of new firms in this perfectly competitive industry would lead to a decrease in the price received, quantity produced, and profit of the existing firm.
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