The demand curve \"as seen by the firm\" varies with the structure of the releva

Question

The demand curve "as seen by the firm" varies with the structure of the relevant market.  What is the structure for a firm that has to act as a price taker?  Is such a firm doomed to suffer losses?  How does the profit/loss situation change between the short run and the long run for such a firm?  In the long run are average costs of production efficient?

What is the structure for a firm with at least some ability to determine price?  How are price and output levels determined rationally?  Since price can, at least to some degree, be determined by the seller, is this firm sure to enjoy profits?  How might the long run differ from the short run?

Explanation / Answer

the structure for a firm that has to act as a price taker IS PERFECT COMPETITIVE MARKET .PERFECT COMPETITIVE MARKET IS A MARKET STRUCTURE WHERE AN INFINITELY LARGE NUMBER OF BUYERS AND SELLERS OPERATE FREELY AND SELL A HOMOGENEOUS COMMODITY AT A UNIFORM PRICE. HERE NO SINGLE SELLER HAS THE ABILITY TO DETERMINE THE PRICE AT WHICH THE COMMODITY IS SOLD. IT THE FORCES OF MARKET DEMAND AND MARKET SUPPLY THAT DETERMINE THE PRICE OF THE COMMODITY. SINCE EACH FIRM ACCEPT THE PRICE DETERMINED BY THE MARKET FORCES OF DEMAND AND SUPPLY IT BECOMES A PRICE TAKER.DEMAND CURVE UNDER THIS STRUCTURE OF MKT IS PERFECTLY ELASTIC i.e. PARALLEL TO THE X-AXIS

NO SUCH A FIRM IS NOT DOOMED TO SUFFER LOSSES ONLY. FIRMS UNDER PERFECT COMPETITION MAY EARN SUPERNORMAL PROFITS OR NORMAL PROFITS OR IT MAY ALSO SUFFER LOSSES IN THE SHORT RUN. BUT IN THE LONG RUN IT EARNS ONLY NORMAL PROFITS THIS IS BECAUSE OF A FEATURE OF THIS MARKET .i.e. UNDER PERFECT COMPETITIVE MARKET STRUCTURE NEITHER ARE THERE ANY BARRIERS TO ENTER OR EXPAND OPERATIONS NOR ANY COSTS ATTACHED TO REDUCE THE SIZE OF OPERATIONS OR CLOSE DOWN A FIRM.

IN THE SHORT RUN IF FIRMS ARE MAKING SUPERNORMAL PROFITS , SEEING THESE PROFITS MORE FIRMS MAY ENTER THE MARKET IN THE HOPE TO EARN SUPER NORMAL PROFITS. BUT AS THE NUMBER OF FIRMS INCREASES THE MARKET SUPPLY INCREASES. BUT THE DEMAND REMAINS CONSTANT IT RESULTS IN MARKET EQUILIBRIUM PRICE FALLING. THE NEW LOW PRICE IS TAKEN BY THE FIRMS IN THE INDUSTRY WHICH REDUCES THE SUPER NORMAL PROFITS TO NORMAL PROFITS IN THE LONG RUN..SIMILARLY IF FIRMS IN A MARKET ARE EARNING LOSSES IN THE SHORT RUN THEN THESE FIRMS EXIT THE MARKET BECAUSE THEY CANOT SUSTAIN LOSSES. IT WILL RESULT IN TO DECREASE IN THE SUPPLY OF THE COMMODITY. GIVEN THE CONSTANT MARKET DEMAND IT RESULTS IN THE MARKET EQUILIBRIUM PRICE RISING RESULTING IN ALL FIRMS EARNING ONLY NORMAL PROFITS IN THE LONG RUN.

A PERFECTLY COMPETITIVE FIRM PRODUCES THE MOST EFFICIENT LEVEL OF OUTPUT IN THE LONG RUN WHICH IS AT THE LOEST POINT OF LONG RUN AVERAGE COST.

ANS- A FIRM WITH MONOPOLISTIC COMPETITIVE STRUCTURE OF THE MARKET HAS THE ABILITY TO DETERMINE PRICE TO SOME EXTENT. UNDER THIS STRUCTURE NUMBER OF BUYRS AND SELLERS ARE LARGE BUT NOT AS LARGE AS UNDER PERFECT COMPETITIVE MARKET. UNDERMONOPOLISTIC COMPETITIVE STRUCTURE OF THE MARKET PRODUCTS ARE DIFFERENTIATED BUT THEY ARE NOT PERFECT SUBSTITUTES FOR EACH OTHER. THIS FEATURE PROVIDES AN ELEMENT OF MONOPOLY TO THE FIRM AND THUS ABLE INFLUENCE THE PRICE OF ITS PRODUCT TO SOME EXTENT. DEMAND CURVE UNDER THIS STRUCTURE OF MKT IS DOWN WARD SLOPING i.e. LESS ELASTIC.

LIKE PERFECT COMPETITION FREE ENTRY AND EXIT IS POSSIBLE UNDER THIS FORM OF MARKET ALSO. SO FIRMS OPERATING UNDER MONOPOLISTIC COMPETION, IN THE LONG RUN, EARN ONLY NORMAL PROFITS.

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