Explain the implication of 'freedom of entry and exit to the firms' under perfect competition.
An important feature of a perfect competition is freedom of entry and exit to the firms. An entrepreneur who has the necessary capital and skill can start any business of his choice. In every industry, new firms are therefore opened from time to time.
Similarly in a market of perfect competition, any existing producer is free to close down his business if he so choose. As a result, some firms are going out of industry. Since there is no hindrance to the entry of new firms and exit of existing firms, the total number of firms under perfect competition remains very large.
Draw average revenue and marginal revenue curves in a single diagram of a firm which can sell more units of a good only by lowering the price of that good. Explain.
8 units of a good are demanded at a price of Rs. 7 per unit. Price elasticity of demand is (-)1. How many units will be demanded if the price rises to Rs. 8 per unit? Use expenditure approach of price elasticity of demand to answer this question.
