Explain the implications of the following:
(i) Freedom of entry and exit to firms under perfect competition.
(ii) Interdependence between firms under oligopoly.
Explain the implications of the following:
(i) Freedom of entry and exit to firms under perfect competition.
(ii) Interdependence between firms under oligopoly.
(i) Freedom of entry and exit of firms under perfect competition ensures that firms get just the normal profit, i.e. Zero economic profit, in the long run. If in the short run, the existing firms are earning super normal profits, the new firms start entering the industry being attracted by profits. This raises industry's output which in turn reduces market price and leads to lowering of profits. This continues till the profits are reduced to normal, i.e. to zero economic profit. Opposite happens if the existing firms are facing losses. The firms start leaving, industry's output falling, market price rising, till losses are wiped out and the firms earning just the normal profits.
(ii) In oligopoly it is assumed that the rival firms are likely to react to any price and output decision taken by a firm. Therefore, an individual firm, before taking any price and output decisions takes into account the likely reactions by the rival firms. It makes the firms interdependent on each other in an oligopoly market.
(i) Freedom of entry and exit of firms under perfect competition ensures that firms get just the normal profit, i.e. Zero economic profit, in the long run. If in the short run, the existing firms are earning super normal profits, the new firms start entering the industry being attracted by profits. This raises industry's output which in turn reduces market price and leads to lowering of profits. This continues till the profits are reduced to normal, i.e. to zero economic profit. Opposite happens if the existing firms are facing losses. The firms start leaving, industry's output falling, market price rising, till losses are wiped out and the firms earning just the normal profits.
(ii) In oligopoly it is assumed that the rival firms are likely to react to any price and output decision taken by a firm. Therefore, an individual firm, before taking any price and output decisions takes into account the likely reactions by the rival firms. It makes the firms interdependent on each other in an oligopoly market.
