Chapter 8: Problem 4

Some of the 200 firms in market X, a perfectly competitive market, are incurring losses. How will these losses influence (a) exit out of the market, (b) the supply of the good produced in the market, and (c) the price of the good? Explain your answers.

Short Answer

Expert verified

Losses incurred by a number of firms in a perfectly competitive market causes those firms to exit the market. This, in turn, reduces the overall supply of the good or service in the market, which leads to an increase in its price.

Step by step solution

Analyze the effect on market exit

In a perfectly competitive market, if a firm is making losses, it implies that the price of the good or service it sells is lower than its average total cost. As this is not sustainable in the long run, firms making losses will gradually exit the market.

Analyze the effect on supply

When firms exit the market, this reduces the overall supply of the good or service being produced. That is because there are fewer suppliers to meet the existing demand.

Analyze the effect on price

As firms exit and overall supply decreases, the price of the good or service in the market will increase. This is due to the principle of supply and demand, which maintains that a decrease in supply will lead to a price increase when the demand stays the same.

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Some of the 200 firms in market X, a perfectly competitive market, are incurring losses. How will these losses influence (a) exit out of the market, (b) the supply of the good produced in the market, and (c) the price of the good? Explain your answers.

Short Answer

Step by step solution

Analyze the effect on market exit

Analyze the effect on supply

Analyze the effect on price

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