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Homework answers / question archive / How do firms behave under conditions of perfect competition? (a) When do they enter a market? (b) When do they leave a market? (c) When do they change their prices?

How do firms behave under conditions of perfect competition? (a) When do they enter a market? (b) When do they leave a market? (c) When do they change their prices?

Economics

How do firms behave under conditions of perfect competition?

(a) When do they enter a market?

(b) When do they leave a market?

(c) When do they change their prices?

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(a) From the information above, we can see that the farmer in perfect competition faces a horizontal demand curve. That means s/he can sell all the farm output as long as they're willing to accept the current market price.

If that price is high enough to cover the farmer's expenses and return a profit, they will continue to operate the farm and grow wheat. If the selling price is high enough to generate above-average profits compared to other businesses, more farmers will start to grow wheat in order to make more money.

(b) On the other hand, if the selling price determined by the market isn't high enough for the farmer to earn a fair return for his efforts and resources, then the farmer will leave the wheat market and grow something else - maybe corn or soybeans - or s/he will cease farming and use their resources for something else.

(c) The farmer, along with any other type of business operating under conditions of perfect competition cannot change the price s/he charges. The price is set by the market interaction of supply and demand. One of the conditions is that no one buyer or seller is big enough to impact the price. Some textbooks refer to this situation by calling the competitors "price searchers" or "price takers."