Perfect Competition Test - 1

The market serves as the nervous system of modern economic life. It is a dynamic system where buyers and sellers interact to exchange goods, services, and resources. Through the market mechanism, prices are determined, signals are transmitted, and resources are allocated efficiently based on the forces of supply and demand.

In perfect competition, the price is determined by the industry as a whole. In this market structure, there are a large number of buyers and sellers, and each firm is a price taker, meaning they have no control over the price of the product they sell. Instead, the price is determined by the interaction of market supply and demand forces in the industry.

Sellers in perfect competition are price takers because they have no control over the price of the goods or services they sell. In a perfectly competitive market, there are numerous buyers and sellers, and the products are homogeneous, meaning they are identical across all sellers. As a result, individual sellers cannot influence the market price; they must accept the prevailing market price as determined by the forces of supply and demand.

In perfect competition, products are identical or homogeneous across all firms. This means that there is no differentiation between the products offered by different firms in terms of features, quality, or branding. 

Homogeneous products ensure that firms in perfect competition compete solely on price, as there is no product differentiation to provide a competitive advantage.

A market is in equilibrium if at the market price the quantity demanded is equal to the quantity supplied. The price at which the quantity demanded is equal to the quantity supplied is called the equilibrium price or market clearing price, and the corresponding quantity is the equilibrium quantity.

Perfect competition refers to a market situation where there are a very large number of buyers and sellers. In a perfectly competitive market, no single buyer or seller has the power to influence the market price. 

In perfect competition, a firm maximizes profit by producing where marginal cost (MC) equals marginal revenue (MR), which is also equal to the market price (P). At this point, average revenue (AR) is also equal to price (P).

If average revenue (AR) exceeds average total cost (ATC) at the profit-maximizing quantity, the firm earns an economic profit. However, if average revenue (AR) is less than average total cost (ATC) at the profit-maximizing quantity, the firm incurs an economic loss.

An industry for which the supply curve and demand curve intersect each other in the positive axes is known as a viable industry.

Viable Industry: An industry is considered viable when it operates in a market where actual production and consumption are occurring. In other words, goods or services are being produced and exchanged at a price that both producers and consumers find acceptable.

Market structure refers to the number and type of firms operating in an industry, along with other characteristics that influence the behavior and performance of firms within that industry. It encompasses aspects such as the degree of competition, the presence of barriers to entry, the differentiation of products, and the extent of control that firms have over prices. Understanding market structure is crucial for analyzing the level of competition, predicting firms' behavior, and assessing market outcomes.

An increase in the cost of production leads to a decrease in supply, causing the equilibrium price to increase due to the upward pressure on prices. However, the equilibrium quantity decreases as the higher cost of production reduces the quantity supplied.