Question

You read in a business magazine that computer firms are reaping high profits. With the theory of perfect competition in mind, what do you expect to happen over time to each of the following?(a) Computer prices(b) The profit of the computer firm(c) The number of computer firm

Answer 1

Answer:

(a) Go down

(b) Decrease

(c) Increase

Explanation:

a) In a perfect competition (PC) market, all market participants are price-takers. In other words, if a company decides to raise price of its current product, customers can easily switch to another substitute which is offered by another seller in the market. Thus, in a PC market, computer prices over time will go down.

b) Even though computer firms are reaping high profits, in the long-run, however, the profit will decrease because new companies will enter the market and offer customers a similar quality but lower price products. It is due to the nature of a PC market, where there is no barrier to entry.

c) Number of computer firm in the market over time will increase because there are no barriers that hinder the entrance of new computer firms from entering the market.