ECO 2301 Exam 2: Module 7
In the short run, if a firm's price is greater than its AVC but less than its ATC, the firm should:
continue operating even though it is generating an economic loss. In the short run, if a firm's price is greater than its AVC but less than its ATC, the firm should continue operating even though it is generating an economic loss. If price > average variable cost, the firm should continue operations, since it only loses, per unit produced, the average fixed cost minus the difference between its price its average variable cost . Were the firm to cease operations, the firm would be worse off since it would lose the average fixed cost per unit otherwise produced.
"I'm losing money, but since my fixed costs are so high, I simply cannot afford to shut down." If the firm were attempting to maximize profit, this decision may be:
correct if the firm is covering all of its variable costs and expects the price of its product to rise in "I'm losing money, but since my fixed costs are so high, I simply cannot afford to shut down." If the firm were attempting to maximize profit, this decision is correct if the firm is covering all of its variable costs and expects the price of its product to rise in the near future. The whole statement is totally valid. A firm may be experience losses and still it could be economically feasible to operate, if the loses of continuing to produce are less than the loses of ceasing production. That case arises when the firm is covering all of is variable costs, which means that the price is greater than the average variable cost.
When the marginal cost of a price-taking firm is less than the market price of its product, the firm should:
expand output (provided that price is not less than average variable cost). When the marginal cost of a price-taking firm is less than the market price of its product, the firm should expand output (provided that price is not less than average variable cost). A price-taking firm should produce an extra unit of output whose marginal cost is less than its price (or its marginal revenue), since the additional cost of producing that extra unit is less than the additional revenue of selling it. The proviso of price not being less than average variable cost excludes the shut-down alternative.
The perfectly competitive model assumes that:
firms can enter and exit the industry with relative ease. Perfect competition is a market structure characterized by: a) A large number of firms or sellers and a large number of buyers; b) The product is homogeneous, which in practical terms means that the good is largely the same; c) There are no barriers to market entry or market exit. The condition that firms can enter and exit the industry with relative ease reinforces the competitive nature of the market, where sellers can easily enter or exit the industry, while buyers can easily switch fro seller to seller. The model of a perfectly competitive market assumes the extreme case of competition, to the point that there are just few cases of such markets as examples, most notably the commodity, the foreign exchange, the agricultural products and the securities markets.
In short run equilibrium in a perfectly competitive industry whose firms are earning economic profits, a firm:
has no incentive to leave the industry. A positive economic profits implies that total revenue exceeds both explicit and implicit costs, which also includes the cost of capital. Zero economic profits is the equilibrium condition in the long run, when price equals average total cost. So, if in a perfectly competitive industry firms are earning economic profits in the short run, a firm has no incentive to leave the industry.
Which of the following is a characteristic of perfect competition?
homogeneous products Indeed. One of the characteristics is that the product is homogenous. Perfect competition is a market structure characterized by: a) A large number of firms or sellers and a large number of buyers; b) The product is homogeneous, which in practical terms means that the good is largely the same; c) There are no barriers to market entry or market exit. Since any individual firm is very small relative to the overall size of the market, no particular firm can affect the market price or quantity exchanged, and it has to accept the price the market determines. So, all perfectly competitive firms are price takers.
If a perfectly competitive firm's marginal revenue was less than its marginal cost,
it would contract its output (but not raise its price) in order to increase its profits. If a perfectly competitive firm's marginal revenue was less than its marginal cost it would contract its output (but not raise its price) in order to increase its profits. For a firm to maximize profits, it has to produce the quantity at which marginal revenue (or price) equals marginal cost. The rule implies that the firm should produce more units of output if the marginal revenue exceeds the marginal cost, that is if the extra revenue of producing one more unit of output is greater than the extra cost of producing that extra unit. The opposite is also true. The firm should produce less units of of output if the marginal revenue is below the marginal cost, that is if the cost saved by producing one less unit of output is greater than the revenue lost by reducing production by that unit. Since the firms operates in a perfectly competitive market, it is a price taker and does not have the option of raising the price.
A profit maximizing perfectly competitive firm would never operate at an output level where
it would not cover all of its variable costs. 'A profit maximizing perfectly competitive firm would never operate at an output level where it would not cover all of its variable costs.' The statement is valid. A profit maximizing perfectly competitive firm should cease to produce if is not able to cover its variables costs, i.e, its price is less than its average variable cost. In that case, it would only lose its fixed costs by not operating.
Which market structure is characterized by many sellers, easy entry, and homogeneous products?
perfect competition In the perfect competition market structure, there are a large number of firms each producing a homogeneous product. There are no substantial barriers to entry, so it is easy to enter or exit the industry. Some examples of perfect competition are the agricultural products, such as milk, eggs, wheat, corn.
The demand curve facing a perfectly competitive firm is:
perfectly elastic. The demand curve facing a perfectly competitive firm is perfectly inelastic. A perfectly competitive firm takes the market price as given; therefore, its demand curve is horizontal. At that market equilibrium price, it can sell as much as it wants. At a higher price, it sells nothing; at a lower price it does help in terms of selling a higher quantity.
In a perfectly competitive industry, influence over price is exerted by:
the forces of supply and demand. In a perfectly competitive industry, influence over price is exerted by the forces of supply and demand by all buyers and sellers together. The market price and output are determined at the intersection of the market supply and demand curves.
A profit-maximizing, price-taking firm should cease production whenever:
the price is less than minimum average variable cost. 'A profit-maximizing, price-taking firm should cease production whenever the price is less than minimum average variable cost.' The statement is valid. For a profit-maximizing price-taking firm,the short term decision criterion on whether to shut down is: Cease production whenever price < minimum average variable cost Continue operations whenever price > minimum average variable cost Notice that this decision is taken assuming that the company is making a loss. Then, it is a case of loss minimization (what matters is to lose the least).
The shape of the long-run industry supply curve in a perfectly competitive industry is largely determined by:
the price of inputs as the industry expands. In the long run, all inputs of production are variable, and it is the price of those inputs that largely determines the shape of the long-run industry supply curve in a perfectly competitive industry, as firms expand existing facilities or built new plants.
Which of the following best resembles a perfectly competitive market?
the stock market
Which of the following most closely resembles a perfectly competitive market?
the wheat market The wheat market better resembles a perfectly competitive market: many farmers in the industry, a homogeneous product, no barriers to entry and farmers are price takers.
A perfectly competitive firm cannot make economic profits in the long run because:
there are no barriers to entry into the industry. A perfectly competitive firm cannot make economic profits in the long run, because there are no barriers to entry into the industry.
When perfectly competitive firms in an industry are earning positive economic profits,
we would expect entry into the industry. When perfectly competitive firms in an industry are earning positive economic profits, one would expect entry of new firms into the industry. Economic profits encourage the entry of new firms, they are the incentive for them to enter. The effect of this entry into the industry is to increase market supply (it shifts to the right), which drives down price until the point where all super-normal profits (economic profits above zero) are exhausted. Only at zero economic profits there is no tendency for firms to enter or leave the industry: a zero economic profits is an equilibrium or stable situation.
When economic profits are positive in a perfectly competitive industry,
we would expect the market supply curve to shift to the right as a result. When economic profits are positive in a perfectly competitive industry, we would expect the market supply curve to shift to the right as a result (see graph below). The reason is that positive economic profits would attract new suppliers to the industry, vowed by the positive economic profits. As a result, the market supply increases (the curve shifts to the right).
A firm that is a price taker:
will lose all sales if it prices its product in excess of the market equilibrium price. A firm that is a price taker will lose all sales if it prices its product in excess of the market equilibrium price. A price taker firm is a seller that cannot control the price of the product it sells: if it prices it above the market equilibrium price, it would sell nothing since no one is going to buy its product when other firms are selling an identical product for less; if it prices it below the market equilibrium price, it is not gaining market share since it can sell as much as it wants at the going market price.
During a period when new entrants are being attracted to an industry, we would expect that:
- economic profits are positive. - economic profits are falling.
If a perfectly competitive industry is neither expanding nor contracting, we would typically expect that:
- economic profits to be zero. - the price of the good will be stable
For a perfectly competitive firm, average revenue is:
- equal to marginal revenue at all levels of output. - equal to price at all levels of output.
Which of the following is false of perfectly competitive firms?
Because perfectly competitive firms are price takers, each firm's demand curve remains unchanged even when the market price changes. Perfectly competitive firms are price takers, but each firm's demand curve is changed even when the market price changes. The statement is false, so this is the correct answer.
Which one of the following is NOT a characteristic of a perfectly competitive market?
Firms advertise in order to distinguish their products and increase market share. In perfectly competitive markets, firms do not advertise in order to distinguish their products and increase market share. There is no need to advertise since products are homogeneous and perfect substitutes.
Marginal revenue for a perfectly competitive firm equals:
Marginal revenue for a perfectly competitive firm equals average revenue at all levels of output. Marginal revenue is the change in total revenue (ΔTR) resulting from selling one more unit. Since the perfectly competitive firm can sell at the market price as many units as it produces, for each additional unit sold, total revenue increases by the price amount. Then, marginal revenue is equal to the price p. Average revenue is total revenue (TR) per unit of output sold (q), or TR / q. Total revenue is the price p times the quantity sold, or TR = p x q. Then, average revenue is equal to (p x q) / q = p. If marginal revenue equals the price p, and average revenue also equals the price p, then, marginal revenue equals average revenue. For example, if a dairy farm sells for $ 3 the gallon of milk, total revenue for 1.000 gallons sold is $ 3.000; total revenue for 1.001 gallons sold is $ 3.003. So, marginal revenue is the difference of $ 3.003 minus $ 3000 = $ 3, which equals the price. On the other hand, ATR for 1000 gallons is 3000/1000 = $ 3, and ATR for 1001 gallons is 3003/1001 = $ 3. Once again, MR = Price = ATR
Which of the following is a characteristic of perfect competition??
None of the other answers is correct. Perfect competition is characterized by no substantial barriers to entry, homogeneous products, many sellers and no market power by the firms in the industry.
Which of the following is true?
The objective of the firm is to maximize profits, by producing the amount that equates marginal revenue and marginal cost. 'The objective of the firm is to maximize profits, by producing the amount that equates marginal revenue and marginal cost.' The statement is correct. A firm should produce an extra unit of output whose marginal revenue is greater than its marginal cost, since the additional revenue of selling that extra unit exceeds the additional cost of producing it. Conversely, a firm should reduce its production an extra unit of output whose marginal revenue is less than its marginal cost, since the cost savings of not producing it outweighs the lost revenue of not selling it. Therefore, the firm would maximize its profits by producing the output at which marginal revenue equals marginal cost.
1. Which of the following is true?
The objective of the firm is to maximize profits, by producing the amount that maximizes the difference between its total revenues and total cost.
Assume that the equilibrium price in a perfectly competitive industry is $4.25. If a firm in this industry produced and sold 10 units with an average total cost of $5.00, the result would be:
a loss of $7.50 Assuming that the equilibrium price in a perfectly competitive industry is $4.25, if a firm in this industry produced and sold 10 units with an average total cost of $5.00, the result would be a loss of $ 7.50 Data given: p = $ 4.25; q = 10 units; ATC = $ 5.00 Since p = AR = $ 4.25, then TR = q x p = 10 x $ 4.25 = $ 42.50 Since ATC = $ 5.00, then TC = q x ATC = 10 x $ 4.25 = $ 50.00 Since Profits = TR - TC, then Profits = $ 42.50 - $ 50.00 = - $ 7.50 (a loss)
Which of the following is true about perfect competition?
- Since a perfectly competitive seller can sell all she wants at the market price, her firm's demand curve is horizontal at the market price over the entire range of output that she could possibly produce. - Because consumers believe that all firms in a perfectly competitive market sell identical (homogeneous) products, the products of all the firms are perfect substitutes. - Perfectly competitive markets have easy entry and exit. - Because perfectly competitive markets have many buyers and sellers, each firm is so small in relation to the industry that its production decisions have no practical impact on the market.
A firm sells grapefruit in a perfectly competitive market at a price of $1.50 per pound. The firm's marginal revenue:
A firm sells grapefruit in a perfectly competitive market at a price of $1.50 per pound. The firm's marginal revenue equals $1.50, which is the price. Marginal revenue (MR) is the change in total revenue resulting from selling one more unit. Since the perfectly competitive firm can sell as many units as it produces without affecting the price, for each additional unit sold, total revenue increases by the price. So, total revenue for 100 pounds of grapefruit sold is $150 (100X1.50); total revenue for 101 gallons sold is $151.50 (101x1.50). So, marginal revenue is the difference of $151.50 minus $150 = $1.50, which equals the price. In the case of a perfectly competitive firm, it does no matter if the calculation is made with 100 units or 10.000 units. The firm can sell any quantity at the market price.
In perfect competition, at the firm's profit maximizing short run output, which of the following is true?
A. Marginal revenue equals marginal cost. B. Price equals marginal cost. C. Average revenue equals marginal revenue. D. It could be earning either economic profits or losses.
Which of the following is true about the long run operations of perfectly competitive firms?
A. They earn zero economic profits. C. They produce with productive efficiency. D. They earn a fair rate of return. E. They produce with allocative efficiency.
2. Which of the following is a characteristic of perfect competition?
A. homogeneous products B. many sellers D. zero barriers to entry E. many buyers
When price exceeds average variable cost for a firm, it is possible that:
A. it is breaking even.
For a perfectly competitive firm, which of the following is always true?
Price = Marginal Revenue = Demand For a perfectly competitive firm, it is always true that price (p) equals marginal revenue (MR) equals demand (D). A firm's total revenue (TR) is equal to the quantity sold (q) times the price (p). For a perfectly competitive firm, the price is the same regardless of the quantity sold, since it can sell all output it produces at the market-determined price. For instance, if a dairy farm produces 1.000 gallons of milk per day and the gallon of milk sells for $ 3 dollars, total revenue for the milk producer is 1.000 x $ 3 = $ 3.000. The price of $ 3 has to be taken as given, assuming that the milk market behaves as a perfectly competitive market of many sellers and buyers of an identical product ("a gallon of milk is a gallon of milk"). Marginal revenue (MR) is the change in total revenue resulting from selling one more unit. Since the perfectly competitive firm can sell as many units as it produces without affecting the price, for each additional unit sold, total revenue increases by the price. Thus, marginal revenue equals the price, which also happens to be the demand curve, represented by a horizontal line (perfectly elastic demand). In the dairy farm example, total revenue for 1.000 gallons sold is $ 3.000; total revenue for 1.001 gallons sold is $ 3.003. So, marginal revenue is the difference of $ 3.003 minus $ 3000 = $ 3, which equals the price (see graph below). The demand curve of the milk farm is a horizontal line at p = $ 3.0 The relevant equations are: TR = p x q MR = Δ TR / Δ q
Firms in perfectly competitive markets:
Since the perfectly competitive firm offers a homogeneous product and participates in market with many sellers and buyers, none of which is large in relation to total sales or purchases, it has no market power and acts as a price taker. A price taker is a firm that has to rely on the market to set the price of its product.
If input costs remain the same as industry output expands, what would you expect to be the long-run impact of an increase in demand on an industry currently in long-run equilibrium?
There will be more firms but the price will remain the same. If input costs remain the same as industry output expands, the long-run impact of an increase in demand on an industry currently in long-run equilibrium will be more firms entering the industry but with no effect on the price. This resembles the case of a constant-cost industry, an industry in which the average cost of production remains the same as total output of the industry increases. The long-run supply curve of an constant-cost industry is perfectly elastic ( a horizontal line). In the short run, an increase in demand will shift the market demand to the right, which in turn will increase the equilibrium price. Since the individual firm is a price taker, its demand (horizontal line) will move upwards, and so its revenues, bringing economic profits above zero. In the long run, new firms will enter the industry, the supply curve will shift to the right bringing down the price to its pre existing level, and causing zero economic profits for the firms in the industry. Under the assumption of a constant-cost industry, input costs would remain the same as industry output expands, thus average cost of production will also stay steady. The end result: more firms, higher quantity supplied as a response to a higher demand but the same equilibrium price.
If your company is in the range of output where it experiences economies of scale, you know:
a 5 percent increase in all inputs will increase output by more than 5 percent. Economies of scale means that an increase of any size in a firm's inputs will result in an even larger increase in the firm's output.
Perfect competition is the term used to describe:
an industry in which numerous price-taking firms produce identical products. Perfect competition is a term used to describe a market structure with numerous price taking firms selling identical products to many buyers, plus easy entry and exit. Since there are a large number of sellers all selling a homogeneous product, each individual firm has no influence on the market price, and has no price-setting power, so the firm is a price-taker. Regardless of how much output the firm sells, the market price is still the same for all firms and no individual seller is large enough to control the market price.
Firms will continue to enter a competitive industry until:
any economic profits have been competed away.
Extractive industries such as farming, mining, or lumbering typically:
are considered to be increasing cost industries. Extractive industries such as farming, mining, or lumbering typically are considered to be increasing cost industries. An increasing-cost industry is an industry in which the average cost of production increases as the total output if the industry increases. As a consequence, the long run supply curve shows a positive slope. Increasing cost conditions occur frequently in the extractive industries, which make extensive use of natural resources such as land and mineral or fossil deposits. As the industry grows, it competes for the limited amounts of those resources, and this competition causes input prices to increase, thus increasing the average cost of production.
A perfectly competitive firm faces a demand curve that is:
horizontal and perfectly elastic. A perfectly competitive firm faces a demand curve that is horizontal and perfectly elastic. For a firm that operates in a perfectly competitive market, the firm specific demand curve is horizontal. Such a firm can sell as much as it wants at the market price; if it charges a higher price, it would sell nothing; and it would not charge less because it could sell any amount at the market price. In the case of perfect elasticity, the price elasticity is infinity and the demand curve is horizontal, implying that only one price is feasible. Note: The overall market has its own supply and demand curves. The market price and output are determined by the forces of demand and supply. It is the individual firm operating in a perfectly competitive market that confronts an horizontal demand curve (see graph below).
If the long-run industry supply curve in a perfectly competitive market slopes upward, then very likely input prices will ____ as industry output expands.
increase If the long-run industry supply curve in a perfectly competitive market slopes upward, then very likely input prices will increase, as industry output expands. That resembles the case of the long-run supply curve of an increasing-cost industry, an industry in which the average cost of production increases as the total output of the industry increases. The long-run market supply curve indicates the relationship between quantity supplied and price, when firms can enter and exit the industry. Since the equilibrium condition implies that the firms in the industry make zero economic profit, then they would operate at that point of production where price equals the average cost of production. If the production output were to increase, the industry will face input price increases which in turn increases the average cost of production, implying a higher price with each higher quantity supplied: an upward sloping supply.
If a perfectly competitive firm is operating in the short run and seeks to maximize profit, the firm should:
increase output whenever market price exceeds marginal cost. If a perfectly competitive firm is operating in the short run and seeks to maximize profit, the firm should increase output whenever market price exceeds marginal cost. For a firm to maximize profits, it has to produce the quantity at which marginal revenue (or price) equals marginal cost. The rule implies that the firm should produce more units of of output if the price (or marginal revenue) exceeds the marginal cost, that is if the extra revenue of producing one more unit of output is greater than the extra cost of producing that extra unit. For example, if a grapefruit producing farm is at production level where its marginal cost is $1.20 per pound and its marginal revenue or price is $1.50 per pound, it should produce more pounds of grapefruits since profits would increase $0.30 per pound. The extra revenue of $1.50 more than covers the extra cost of $1.20, and there is an extra profit of $0.30 per pound.
Assume a perfectly competitive firm sells its output for $250 per unit. At its current 2,000 units of output, marginal cost is $180 and increasing, and average variable cost is $160. Assuming it wants to maximize its profits, it should:
increase output. The firm should increase output, since by producing one more unit of output its total revenue would increase by $250, its marginal revenue or price, while its total cost would increase by $180, its marginal cost. That implies that profit would increase by $70 for each additional unit produced.
If perfectly competitive industry B is currently realizing economic profits, we would expect that:
industry output will rise, good B will fall in price, and economic profits will tend to disappear. If perfectly competitive industry B is currently realizing economic profits, we would expect that industry output will rise, good B will fall in price, and economic profits will tend to disappear. Firms will enter the industry B if the existing firms are making above zero economic profits, since new firms will be attracted into the industry if the incumbent firms are making supernormal profits. As new firms enter the market, the market supply will increase since the market supply curve is the summation of all individuals firms' supply curves. If the market supply increases (it shifts to the right) and demand stays the same, then the market price will decrease and the quantity (industry output) will rise (see graph below). As the price comes down, then the individual firms' profits would tend to disappear; they would move from positive to zero economic profits.
The horizontal demand curve facing an individual firm in a perfectly competitive market:
is a reflection of the firm's small size relative to the total market. The horizontal demand curve facing an individual firm in a perfectly competitive market is reflection if the firm's size relative to the total market. A perfectly competitive market is composed of a large number of firms that sell identical products to many buyers. Each perfectly competitive firm is so small relative to the size of the market that it has no market control and it has no ability to control the price. It can sell any quantity of output it wants at the market-determined price. This means that the firm faces a perfectly elastic demand curve (horizontal curve).
A firm facing a horizontal demand curve:
is characterized by all of the above. Indeed. A firm facing a horizontal demand curve is characterized by all of the above. Statement A is true: A firm facing a horizontal demand curve cannot affect the price it receives for its output. Statement B is true: A firm facing a horizontal demand curve is unlikely to price its goods below market price. Statement C is true: A firm facing a horizontal demand curve faces a perfectly elastic demand curve for its product.
A price-taking firm will tend to expand its output as long as price exceeds average variable cost and:
its marginal cost is less than the market price. A price-taking firm will tend to expand its output as long as price exceeds average variable cost and its marginal cost is less than the market price. The reason? a) The fact that the marginal cost is less than the market price implies that the firm could increase its profits by expanding output, since the extra revenue of producing more units is greater than the extra cost of producing them. b) The fact that the price exceeds average variable cost implies that the firm does not confront a shut down decision. The shut down criterion can be summarized in the following three inequalities, all of which are equivalent. Shut down if Total Revenue < Total Variable Cost; or Average Revenue < Average Variable Cost; or if Price < Average Variable Cost.
A perfectly competitive firm has no influence over price because:
its output is insignificant relative to the market as a whole. A perfectly competitive firm has no influence over price because its output is insignificant relative to the market as a whole. Perfect competition is a term used to describe a market structure with numerous price taking firms selling identical products to many buyers, plus easy entry and exit. Since there are a large number of sellers all selling a homogeneous product, each individual firm has no influence on the market price, and has no price-setting power, so the firm is a price-taker. Regardless of how much output the firm sells, the market price is still the same for all firms and no individual seller is large enough to control the market price. Each firm is so small (one among many) in relation to the industry that its production decisions have no impact on the market.
A perfectly competitive firm seeking to maximize its profits would want to maximize the difference between:
its total revenue and its total cost. Profit is equal to total revenue minus total cost. Thus, a perfectly competitive firm seeking to maximize its profits would produce at that level of output that maximizes the difference between total revenue and total cost.
A profit-maximizing firm in a perfectly competitive market will always produce a quantity of output that:
maximizes the amount by which total revenue exceeds total cost. A profit-maximizing firm in a perfectly competitive market will always produce a quantity of output that maximizes the amount by which total revenue exceeds total cost. A firm in a competitive market, or for that matter in any market, tries to maximize profits, the difference between total revenues and total costs. Profit = Total Revenue (TR) - Total Cost (TC)
A perfectly competitive firm is a:
price taker. Perfect competition is a market structure characterized by: a) A large number of firms or sellers and a large number of buyers; b) The product is homogeneous, which in practical terms means that the good is largely the same; c) There are no barriers to market entry or market exit. Since any individual firm is very small relative to the overall size of the market, no particular firm can affect the market price or quantity exchanged, and it has to accept the price the market determines. So, all perfectly competitive firms are price takers. For example, the corn farmer has to accept the market price as given. He has no reason to increase the price, since he will not be able to sell anything for he would lose his clientele to other farmers selling at the market price; he has no reason to reduce the price for he can sell all of his production at the market price.
If a profit-maximizing firm finds that price exceeds average variable cost and marginal cost is greater than marginal revenue, it should:
reduce output, but continue producing in the short run. If a profit-maximizing firm finds that price exceeds average variable cost and marginal cost is greater than marginal revenue, it should reduce output, but continue producing in the short run. For a firm to maximize profits, it has to produce the quantity at which marginal revenue (or price) equals marginal cost. The rule implies that the firm should produce less units of of output if the marginal revenue is below the marginal cost, that is if the cost saved by producing one less unit of output is greater than the revenue lost by reducing production by that unit.
A competitive firm facing a perfectly elastic demand curve can:
sell all of its output at the market price. For a firm that operates in a perfectly competitive market, the firm specific demand curve is horizontal or perfectly elastic. Such a firm can sell as much as it wants at the market price, if it charges a higher price it would sell nothing, it would not charge less because it could charge the market price and sell any amount. In the case of perfect elasticity, the price elasticity is infinity and the demand curve is horizontal, implying that only one price is feasible (see graph below).
If new entry occurs in a perfectly competitive industry, the demand curve for each existing firm will:
shift down. If new entry occurs in a perfectly competitive industry, the demand curve for each existing firm will shift down, since the increased industry supply would cause the market price to decline. Firms will enter the industry if the existing firms are making above zero economic profits. As new firms enter the market, the market supply will increase since the market supply curve is the summation of all individuals firms' supply curves. If the market supply increases (it shifts to the right) and demand stays the same, then the price will decrease (see the graph below). Since the price is also the perfectly elastic demand curve (horizontal line) of each individual firm, then the demand will decrease, or shift down.
If the market demand curve in a perfectly competitive industry shifts left, the demand curve for each existing firm will:
shift down. If the market demand curve in a perfectly competitive industry shifts left, the demand curve for each existing firm will shift down. When the market demand curve in a perfectly competitive industry shifts left, then market demand decreases and the new market equilibrium price is below and to the left of the initial equilibrium price. Therefore, each firm's demand curve, which is horizontal, would shift down, moving in parallel fashion.
If the market demand curve in a perfectly competitive industry shifts right, the demand curve for each existing firm will:
shift up. If the market demand curve in a perfectly competitive industry shifts right, the (horizontal) demand curve for each existing firm will shift up. In a perfectly competitive market the forces of demand and supply would determine the market price, as usual, at the interception of the corresponding demand and supply curves. If any or both of the curves change (shift left or rightwards) the market price is going to change, and the demand curve for the individual seller will also change. If the market demand curve in a perfectly competitive industry shifts right, the market equilibrium price will increase, and so the quantity, thus the individual seller's demand curve will shift upwards, to reflect the higher market-determined price. However, it would remain being horizontal or perfectly elastic.
