If the market demand for the product increases, in the short run a purely competitive firm:

A) Will experience no change in costs as it steps up production in response to the change in the

market

B) Will not change its output quantity because there are so many firms that the individual firm

will not be affected by the change

C) Can employ more inputs and increase the size of its plant, to respond to the change in the

market

D) Will earn higher profits or experience smaller losses as a result of the change in the market

Question

Business

Barney

7 July, 09:35

If the market demand for the product increases, in the short run a purely competitive firm:

A) Will experience no change in costs as it steps up production in response to the change in the

market

B) Will not change its output quantity because there are so many firms that the individual firm

will not be affected by the change

C) Can employ more inputs and increase the size of its plant, to respond to the change in the

market

D) Will earn higher profits or experience smaller losses as a result of the change in the market

+4

Answers (1)

Know the Answer?

Justine Chavez · Answer 1

Answer: D) Will earn higher profits or experience smaller losses as a result of change in the market

Explanation:

Perfect (pure) competition is a market form with very large no. of buyers (firms) & sellers, homogeneous products, uniform price, perfect information about prices.

So, in such case - firms are only 'price takers' from the industry price maker.

Increase in market demand for the industry product will shift the downward sloping market demand curve rightwards & firm's horizontal demand / AR / MR curve (horizontal because of uniform price & perfectly elastic demand) upwards.

This increase in marginal / average revenue will increase the perfect competition firm's profit or reduce its losses.