In conditions of perfect competition, firms need to take into account some nuances. The absence of production leads to losses, so continuing the business only makes sense if the losses are reduced to the level of costs. The optimal scenario of perfect competition implies minimal costs and maximum income.
Companies have the opportunity to choose different types of activities due to the low threshold for entry and exit to the market. But the absence of barriers leads to increased competition for resources. In case of losses, producers reduce their consumption and production volume. Each industry has its own peculiarities of work. Perfect competition promotes the growth of the number of firms in it. Existing companies can expand and increase their market share. Because of this, they receive some advantages. However, high competition can lead to leaving the industry or complete liquidation of production.
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Marginal revenue under perfect competition
Perfect competition can have a negative impact on the growth of enterprises. Here it is worth mentioning the marginal revenue. It is because of it that companies prefer not to expand production capacity, not to increase the area of crops, etc.
Marginal revenue under perfect competition
Source: shutterstock.com
Let's look at a specific example. Let's assume that one of the agricultural producers is engaged in the sale of milk and decides to expand production. Currently, the company receives a net profit of 100 rubles from each liter of production. Having decided to invest in the expansion of feed bases and the construction of complexes, the company increases production by 15%. But its competitors are also taking such actions. As a result, one and a half times more milk enters the market, which leads to a drop in the price of the product by 40%.
This situation puts production at risk, as losses mount. The more animals a producer keeps, the greater the costs he will incur. The perfectly competitive industry is on the path to economic decline. This example illustrates the concept of marginal revenue, where further price increases become impossible, and an increase in supply on the market only leads to losses.