Chapter 9.1, Problem 3R

To determine

To state: The way Perfect competition drive down the profits.

Explanation of Solution

In a perfect competition, there are huge number of buyers and sellers that produce homogeneous products; thus, the firms don’t have enough capability to control or manipulate the industry.

When the markets are perfectly competitive, they make profits or losses for a short run. If we look at the scenario for the long run, profits and losses are removed due to the large number of firms selling identical products. Also, there are no barriers to entry and exit to the firms in the market, so it becomes easy for new organizations to gain entry into the market and therefore, no firms are in a position to attain influence or monopoly in the market, which in turn have a tendency to drive down the long term profits.

Economics Concept Introduction

Introduction: In a perfect competition, there are huge number of buyers and sellers that produce homogeneous products; thus, no firm has enough capability to control the industry.