Explain the term Purely Competitive Firm

Question

Explain the term Purely Competitive Firm with the help og figure?

Answer 1

Purely Competitive Firm: An individual firm in this kind of market is too small, as compared to the net size of the market, that it has no capability to set its price separately. When the firm tries to charge a price greater than the one which is prevailing in market, customers will not purchase from it since everyone knows through free price information which the other firms are charging less. The firm could charge less than the market price, however why would it do that -- it can vend all it is willing to generate at the equilibrium price, PE. In outcome, the firm sees its demand as a horizontal line at the value of PE.

Purely competitive firm’s demand is the present market price, and its marginal revenue. When the firm expects to vend each and every additional unit at the going market price, and that price is the additional revenue predicted for selling more units, or the marginal revenue. The firm’s marginal cost (abbreviated as MC) in this diagram is dropping/falling at low levels of production, falls to a minimum value, and then starts to rise as output keeps rising. The U-shape of MC reflects raising then reducing returns in production.