Firms operate in a market structure that approaches perfect competition typicall
ID: 1205169 • Letter: F
Question
Firms operate in a market structure that approaches perfect competition typically are known as "price takers", i.e., the individual firm can only expect to get the price dictated by supply and demand conditions and the decisions of the individual firm do not affect their price. for example, an individual wheat producer cannot do anything to change the price as wheat is not differentiated and there are thousands of producers. If you were the manager of a large farm that produced wheat, what strategies could you employ to try to assure the financial health of the firm?
Explanation / Answer
A firm, irrespective of which market structure is belongs to have two considerations to deal with. One is to maximise its profits to the maximum and the other is to minimise its cost to its minimum.
When considering a perfectly competitve market, where there is no product differentiation and the firms are price takers, then the best that the manager of the farm can do is to minimise its cost and at the same time maximise its production. Cost plays an important role in maximising profits of the firm by getting into cost-effective methods of production. And at the same time, more production would increase the revenues of the firm by selling more, since it cannot influence the price, so the best strategy is to maximise its sales through minimising cost.
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