With the theory of perfect competition in mind, what will happen to the following things over time, (according to microeconomic theory, if computer firms are reaping high profits): computer prices, the profits of computer firms, and the number of computers on the market?

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According to the theory of perfect competition, there are no barriers to entry in the market. In this case, more investors will invest in the computer business because the venture has huge potential. As a result, computer prices will go down. As the number of sellers increases, the competition levels...

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According to the theory of perfect competition, there are no barriers to entry in the market. In this case, more investors will invest in the computer business because the venture has huge potential. As a result, computer prices will go down. As the number of sellers increases, the competition levels go up. Every seller wants to make money, and they cannot do that if they all sell computers at the same price. Therefore, some firms will reduce prices because they want to attract price-conscious buyers. In perfect competition, the buyer has good knowledge of the product and market, and they can go elsewhere if they feel that the price is too high.

Since prices have reduced, the profit margins will also reduce. Computer firms won’t make as much money as before because the market is flooded with other investors in the same business. As a result, the market share of most firms reduces. Since they cannot increase prices to maintain the same level of profits, they have to make do with lower profits.

On the other hand, the number of computers in the market will increase because there will be more sellers eager to reap the benefits of that business. As a result, customers will have more variety.

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Perfect competition is a theoretical market structure which assumes that all firms are selling an identical product. This market assures that the market price cannot be influenced by the firms or the market share. Perfect competition is the opposite of a monopoly. Perfect competition is a market of many buyers and sellers. Within a perfect competition, if companies are reaping high profits, then other companies will enter the market place to drive the profits down. This will also cause prices to fall. If firms begin making a loss, then they will leave the industry causing prices to rise until the market place stabilizes. Demand will affect the number of computers on the market. If the demand increases, the price will increase, driving more firms into the marketplace.

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First, one should note that this presumes that all computers are identical and that products are not differentiated in any way. This is, of course, not true about computers in the real world, as there are many different models of computers with different features. In fact, modern business strategy is focused on branding and product differentiation precisely to avoid the scenario of perfect competition.

With this caveat in mind, let us assume that in our fictional universe precisely one model of computer exists and that all computer firms make that precise model. Next, the theory of perfect competition also assumes (again, unrealistically) that there are no barriers to entry for competitors (such as patents). A more realistic scenario would use basic consumer goods such as paper towels or gasoline as an example.

Under this theory of perfect competition, high profits would lead competitors to enter the market, thus driving down prices to the minimum needed to make a profit. This would lead to more computers being produced, more firms making computers, and lower prices. Under this scenario, there would be little incentive to innovate, as other competitors would immediately leap into the market with copycat products.

Of course, this theory ignores the possibility that monopolies or oligopolies with deep pockets might temporarily sell products at a loss to force competitors out of business or buy out possible competitors and then raise prices— something that has, in fact, happened in the case of airlines and certain other industries.

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Here are a few predictions that were not mentioned.

1. Computers would have to get better and more innovative. In fact, I would say that there would have to be some major advancement, or computer companies will not be able to sustain growth. Why would people buy another computer without good reason?

2. In time the number of computers in the world will increase to the point that it might hurt the computer market. Through this, sales may eventually do down.

3. While times are good, many allied companies will do well, such a advertising.

 

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First of all, I do not think you should think of computer firms as being in perfect competition.  They are not homogeneous products...  But assuming that these firms are in perfect competition, you would expect:

  • Computer prices would go down because supply would go up.
  • The profits of computer firms would go down as the prices went down.  If it is perfect competition, they must go down to zero economic profit.
  • The number of computers on the market will go up.  Again, supply has gone up so the equilibrium quantity sold will go up.

So, the main thing to remember is that if firms are making high profits in a perfectly competitive market, then the supply in that market will rise.  From there, you should be able to figure out the rest of those questions.

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