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Parking Economics - Essay Example

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In this period, many firms sell the same products to many buyers no restrictions have been set forth to restrict entry into the industry. In a perfect competition situation, firms that have established…
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Parking Economics
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Parking Economics

Download file to see previous pages... Each of the firms produces goods or services that do not have any unique characteristics when compared to the other firms.
In perfect competition, each firm takes the price that is in the market. Not a single firm can set or determine the price of the goods, and they must take the equilibrium price. The output of each firm is usually a perfect substitute of the other firms’ output. The demand for the firm’s output is thus perfectly elastic. The market supply and demand, determine the market price that a firm must take. All firms can sell any quantity of goods at the market price. The marginal revenue is equal to the price. The demand curve for the products is horizontal ant the market price (Parkin 12).
The demand that is associated with the products of a firm is perfectly elastic; because a sweetener for one firm is a perfect substitute for the sweetener of the other firm. The market demand can thus not be perfectly elastic since the sweetener is a substitute for other goods. In perfect competition, the goal of any firm is to maximize profits given the constraints that the firm will face. The firm must then decide on how to reduce production costs, what quantity of goods to produce and when the firm should enter or exit the market (Parkin 35).
In a perfectly competitive firm, the output that maximizes the economic profit is chosen. The firm looks at the total revenue and the total cost curves to find the profit-maximizing output, the difference between the total revenue and the total cost is the economic profit. At the low output levels, a firm will incur an economic loss and with this the firm cannot recover the fixed costs. At the intermediate level, the firm makes some economic profit (Parkin 36).
The firm can also use marginal analysis to determine the profit-maximizing output. Marginal revenue is constant, and the marginal cost increases as the output increases, with this, the ...Download file to see next pagesRead More
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