Q#1: Describe the salient features of a firm in a Perfect Competition?

Perfectly competitive market has 3 characteristics: 1) THE GOOD OFFERED BY THE VARIOUS SELLERS ARE LARGELY THE SAME: Each firm in a perfectly competitive market sells an identical product. The essential feature of this characteristic is not so much that the goods themselves are exactly, perfectly the same, but that buyers are unable to discern any difference. In particular, buyers cannot tell which firm produces a given product. There are no brand names or distinguishing features that differentiate products by firm.
This characteristic means that every perfectly competitive firm produces a good that is a perfect substitute for the output of every other firm in the market. As such, no firm can charge a different price than that received by other firms. If they should try to charge a higher price, then buyers would immediately switch to other goods that are perfect substitutes.

2) FIRMS CAN FREELY ENTER OR EXIT THE MARKET Perfectly competitive firms are free to enter and exit an industry. They are not restricted by government rules and regulations, start-up cost, or other barriers to entry. Likewise, a perfectly competitive firm is not prevented from leaving an industry. Perfectly competitive firms can acquire whatever labor, capital and other resources. 3) THERE ARE MANY BUYERS AND MANY SELLERS IN THE MARKET A perfectly competitive market or industry contains a large number of small firms, each of which is relatively small compared to the overall size of the market. This ensures that no single firm can exert market control over price or quantity. If one firm decides to double its output or stop producing entirely, the market is unaffected.
-------------------------------------Q#2: Explain the 3 profit out comes of the firm in the perfect competition? There are 3 profit out-come conditions in Perfect Competition: 1) P = ATC = NP 2) P > ATC = EP 3) P < ATC = EL
Average total cost decreases with additional production at relatively small quantities of output, then eventually increases with relatively large quantities of output. Average total cost, when combined with price, determines per unit profit or loss that a profitmaximizing firm receives from short-run production. If price is greater than average total cost, then the firm receives positive economic profit per unit. If price is less than average total cost, the firm incurs a loss, or negative economic profit, per unit. If price is equal to average total cost, then the firm is just breaking even, receiving neither a per unit profit nor incurring a per unit loss.

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Q#3: Describe a Shut Down situation of a firm in the Perfect competition? Following are the 3 Shutdown conditions of a firm: 1) P = AVC = Shutdown 2) P > AVC = Definite Production 3) P < AVC = Definite Shutdown The shutdown point is the point at which the firm will gain more by shutting down than it will by staying in business. As long as total revenue is more than total variable cost, temporarily producing at a loss is the firms best strategy since it is taking less of a loss than it would by shutting down. A firm should continue to produce as long as price is greater than average variable cost. Once price falls below that point it makes sense to shut down temporarily and save the variable costs. The firm will shut down if it cannot cover average variable costs. ----------------------------------------Q#4: Difference between short run supply curve of a firm in perfect competition and long run supply curve in perfect competition? SHORT RUN SUPPLY CURVE Short-run analysis of perfection competition is positive relation between price and the quantity of output supplied. The supply curve for a perfectly competitive firm is positively sloped. This relation is generated for two reasons: A perfectly competitive firm produces the quantity of output that equates price and marginal cost. The marginal cost curve is positively sloped.

Taken together these two observations indicate that a higher price entices a perfectly competitive firm to increase the quantity of output produced and supplied. In particular, a perfectly competitive firm's marginal cost curve is also its supply curve. LONG RUN SUPPLY CURVE In the long run, with all inputs variable, a perfectly competitive industry reaches equilibrium at the output that achieves the minimum efficient scale, that is, the minimum of the long run average cost curve. This is achieved through a two-fold adjustment process.

Entry and exit of firms into and out of the industry. This ensures that firms earn zero economic profit and that price is equal to average cost. Profit maximization by each firm in the industry. This ensures that firms produce the quantity of output that equates price (and marginal revenue) with short-run and long-run marginal cost.

With price equal to marginal cost, each firm is maximizing profit and has no reason to adjust the quantity of output or factory size. With price equal to average cost, each firm in the industry earns only a normal profit. Economic profit is zero and there are no economic losses, meaning no firm is inclined to enter or exit the industry. --------------------------------------------------------