Economic Assignment Example | Topics and Well Written Essays - 1000 words - 1

Economic - Assignment Example In the perfect competition case the focus of the discussion is break-even profits in the long run. In the perfect competition scenario the emphasis of the analysis is on product differentiation strategy. In our first case we have small firm operating in a very competitive environment. The type of environment this company is dealing with can be categorized in economic terms as a perfect competition market structure. Perfect competition is an economic market structure that has many sellers and buyers participating where the firms sell identical products which allows for customers to substitute goods or services with ease (Investopedia, 2009). In this market structure the barriers of entry as low. The low barriers of entry create easy access for suitors to participate in the marketplace. Due to the intense competition companies often leave the marketplace. The fact that products are similar in nature allows for many substitute products to appear. A good example of businesses that participate in perfect competition is the agricultural industry players. In perfect competition the formula to determine profits is price equals marginal costs equals marginal revenues (P=MC=MR). A qualitative interpretation of this formula is that there are cero economic profits achieved in the long run. Since the sellers realize the existence of the zero profit phenomenon merchants are not worried as much about unitary profits in the short run, they instead concentrate on accumulating profits over the long survival. Survival for companies operation under perfect competition is the sign of success. Appendix A shows a graphical illustration of profit behavior under perfect competition. Case b in the graph illustrates the zero profit long run scenario. Appendix B provides more details about the equilibrium that creates a break even profit. Understanding the true reasons why there is not profit in this market structure in the long run is not really that complicated. The profits and