Question

5. List the five assumptions of perfect competition and tell how they combine to insure that in the long-run, a firm in a perfectly competitive industry makes zero profit and is a price taker.

Answer 1

The perfect competition is a market structure type in which

• there are large number of buyers and sellers in the market
• the price is decided only by the market forces that is demand and supply so they are the price takers
• there are no barriers to entry and exit in this market
• it is assumed that both buyers and sellers have full knowledge about the market
• the products are homogeneous in nature

Now we also know that in the long run economic profit earned in this market is zero which is also called normal profit

In the long run when due to no barrier to entry or exit there are many firms that enters in the market and this will cause more supply as compared to demand in the market

There are many firms leave the market and and ends up by earning them as zero economic profit

So they are also called price takers