3. In a price-taker market, if a business operator produces efficiently-that is,
ID: 1094819 • Letter: 3
Question
3. In a price-taker market, if a business operator produces efficiently-that is, if the cost of producing the good is minimized-the operator will be able to make at least a normal profit. True or false? Explain. 5. If coffee suppliers are price takers, how will an unanticipated increase in demand for their product affect each of the following, in a market that was initially in long-run equilibrium? a. the short-run market price of the product b. industry output in the short run c. profitability in the short run d. the long-run market price in the Industry e. industry output in the long run f. profitability in the long run 8. Why does the short-run market supply curve for a product slope upward to the right? Why does the long-run market supply curve generally slope upward to the right? Why is the long-run market supply curve generally more elastic than the short-run supply curve? 9. How does competition among firms affect the incentive of each firm to (a) operate efficiently (produce at a low per-unit cost) and (b) produce goods that consumers value? What hap-pens to firms that fail to do these two things?Explanation / Answer
ANSWER 1 :- Yes it is true that in a price taker market a firm can enjoy normal profit by working efficiently. If the firm do not work efficiently its average cost will increase. But the firm can not increase the price of the product because there are other firms in the market which are charging reasonable price and the customer will prefer to buy from those who are selling at reasonable price. Hence the profits of the firm will decrease because of the perfect knowledge in market.
ANSWER 2 :- A) In a price taker taker market price is determined where there is equilibrium between demand and suppy. If in the short run demand of coffee increases the coffee industry can not produce more in the short run hence the industry will increase the price and with an increase in price consumer will reduce the demand. finally the market will reach the equilibrium again.
B) The industry output can not be increased in the short run because there are some factors of production whch are constant in the short run.
C) As i told you that the industry will increase short period prices to reach the equilibrium again, there will be no change in the profits because prices will change for all the firm. Hence the firms will continue to earn normal profits.
D) In the run firm can meet the demand of the market by increasing the price because in the long run all factors of production are working. the industry can increase the output by employing more factors of production.
E) As the industry can employee more resources the output of whole industry will increase.
F) IN LONG RUN FIRM WILL EARN NORMAL PROFITS ONLY BECAUSE A SINGLE FIRM CAN NOT INFLUENCE THE MARKET PRICE. BUT IF WHOLE INDUSTRY WILL INCREASE THE PRICE THEN ALL THE FIRM ENJOY MORE PROFITS. BUT THIS PROFIT WILL BE CALLED NORMAL PROFIT AS ALL THE FIRMS ARE EARNING SAME LEVEL OF PROFIT.
ANSWER 3:- following are the reasons for upward slop of the market suply curve in the short run:
1. in the short run the wage rate for labour is fixed. hence the firms get motivated to increase the output with an icrease in price because the profits of the frm will increase.
2. in short run firms do not use the fixed capital equipment to full extent. hence if demand increase in the market the firms start using it to the full extent this will not affect the profits of the firm in negative way. hence if prices increase the cost of production will not increase with increase in output but the profits of the firms will increase.
the supply curve of firm is upward sloping in the long run also because in long the firm hire more reasouces and start greater level of production. At the large scale production level a firm enjoys economies of scale by which the cost per unit will decrease and profits of firm increase. this mtivates firms to produce or supply more with increase in prices.
supply curve is more elastic in long run in comparison to the short run curve because in long run the resources can be fully utilised for production and also the resources can be increased and technology can improved in the long run. but in the short run firms can only increase the labour force.
ANSWER 4:- If there is competition in the market every firm tries to make those product which are demanded by the consumer. they also tries to reduce the cost of production and improve the quality of good and services because customer gets to atracted toward to those products which are good in quality and less costly. if any firm fails to do so the will suffer loses because of decrease in demand and shif of customer to other firm.
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