address concepts of cost structure and perfectly competitive markets

As highlighted in this week’s Learning Resources, typical firms in perfectly competitive markets will find the optimal ways to use and allocate their resources to be as efficient as possible and achieve success in the long run. In part, this outcome is due to the nature of firm cost functions and their influence on output and pricing decisions related to profit maximization. For example, if there are two vegetable sellers at a farmer’s market, they may not be able to compete with each other in price because of how low the prices are already. However, if one seller has to hire help to grow the vegetables and the other has found a more efficient way to grow them without help, then that other seller will likely be able to stay in business longer because there are no payroll expenses.

In this Assignment, you will address concepts of cost structure and perfectly competitive markets, including the relationship between a typical firm’s cost functions and its pricing and output decisions.

To prepare for this Assignment:

Review this week’s Learning Resources, in particular the material on firm and industry cost functions.
Refer to the Academic Writing Expectations for 1000-Level Courses as you compose your Assignment.

BY DAY 7

Submit your responses to the following prompts.

Using the definition and characteristics of perfectly competitive industries, explain why—in the long run—firms earn zero economic profits. Does this mean that competitive firms earn zero accounting profits? Your response should be at least 75–150 words (1–2 paragraphs) in length.
Joe’s Widget Factory operates in a perfectly competitive industry. Joe’s fixed and variable costs are given in the table below. He is a price taker and can sell as many widgets as he produces for $10 each. Complete the table using the provided link and respond to the following questions. Besides referring to your table to support your answers, include references from the course materials on profit maximizing rules for competitive firms. Your response should be at least 75–150 words (1–2 paragraphs) in length, including table.

What is the profit maximizing (or loss minimizing) level of output in the short run?
What is the profit maximizing level of output in the long run?
What are the shut-down prices in the short run and long run?
What is the firm’s supply curve?
Note: Use this Week 3 Assignment Worksheet to complete the following table. Be sure to incorporate your table into your Assignment submission.

Widgets ProducedFixed CostsVariable CostsTotal CostsAverage Variable CostAverage Total CostMarginal CostPrice = MRProfits0250    10 1258    10 22515    10 32523    10 42532    10 52542    10 62553    10 72565    10 82578    10 92592    10

Based on your answers to the previous set of questions, assuming there are 100 identical firms in the widget industry, construct a table showing the industry supply curve. Then, explain what you expect will happen over time to the number of firms in the industry and the equilibrium industry price of widgets. Your response should be at least 75–150 words (1–2 paragraphs) in length, including the table.

Note: For each prompt, be sure to reference at least one scholarly source to support your answer. Use the Walden Undergraduate Paper Template, provided in this week’s Learning Resources, to complete this Assignment.

address concepts of cost structure and perfectly competitive markets

**Prompt 1:**

In perfectly competitive industries, firms earn zero economic profits in the long run due to the presence of free entry and exit. In the long run, firms in perfectly competitive markets adjust their inputs and production levels until economic profits are driven to zero. This occurs because if firms were earning economic profits, new firms would enter the market attracted by the potential for profit. As new firms enter, the market supply increases, driving down prices until economic profits are eliminated. Conversely, if firms were experiencing economic losses, existing firms would exit the market, reducing market supply and allowing prices to rise until profits return to zero. However, competitive firms may still earn positive accounting profits as accounting profits account for explicit costs only and do not consider the opportunity cost of capital invested in the business.

**Prompt 2:**

Please see the completed table in the Week 3 Assignment Worksheet.

– The profit-maximizing (or loss-minimizing) level of output in the short run is where marginal cost (MC) equals marginal revenue (MR), which is the output level of 5 widgets. This is where MC = MR = $10.

– In the long run, the profit-maximizing level of output occurs where average total cost (ATC) is minimized, which is at the output level of 7 widgets. This is where ATC is at its lowest point, $9.28.

– The shut-down price in the short run is where price is below average variable cost (AVC), which occurs when output is 2 widgets. In the long run, the shut-down price is where price is below average total cost (ATC), which is at an output level of 2 widgets.

– The firm’s supply curve is the portion of the marginal cost curve above the minimum point of the average variable cost curve.

**Prompt 3:**

Please see the completed table in the Week 3 Assignment Worksheet.

Industry Supply Curve:

Widgets Produced  Price

0                                  $10

1                                  $10

2                                  $10

3                                  $10

4                                  $10

5                                  $10

6                                  $10

7                                  $10

8                                  $10

9                                  $10

10                                $10

Over time, in a perfectly competitive industry with identical firms, we would expect to see adjustments in the number of firms in response to economic profits or losses. If firms are earning economic profits, new firms will enter the industry, increasing the industry supply and driving down prices until profits are driven to zero. Conversely, if firms are experiencing economic losses, some firms will exit the industry, reducing supply and allowing prices to rise until profits return to zero. This process continues until economic profits are zero and the industry reaches long-run equilibrium.

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