Briefly explain the nature of a perfectly competitive firm. Briefly discuss the effects of new entrants into a perfectly competitive market on existing firms that have profits in the short run.

Perfectly competitive firm means that there are many buyers (consumers) and sellers (producers) in the market and none of the companies can control the pricing (they are price takers).

Explanation:

Characteristics of a perfectly competitive firm.

1. Many buyers and sellers

2. No transaction cost

3. As for new entrants into the market, there are no barriers for them to enter the market

4. Products are undifferentiated (identical)

5. There is perfect information concerning the pricing of the good

Examples of perfectly competitive firms

1. Foreign exchange markets

The currency is undifferentiated, it's identical in all trading platforms.

If you are a trader you have access to many buyers and sellers.

Information about the prices are available and accurate.

The nature of perfect competition is that there exist a large number of firms in an industry. However their products are identical from one seller to another, and sellers are referred to as price takers.

Perfect competition refers to a

situation whereby there are many sellers in the firm, and the entering and exiting of the firm is easy and accessible.

In the perfect competitive firm, the firms in the competitive market has no control in changing the supply and demand of the market.

Perfectly competitive firm can be described as price taker, i. e it must accept the equilibrium price at which it sells it's goods.

The effects of new entrants into a perfectly competitive market on existing firms that have profits in the short run will shift the demand curve of each individual downward, this will now makes the price to fall, and also the average revenue and marginal revenue curve. In addition the productivity of firms in the market will be proportional to their optimal level of production.