Explain how a university would look if it operated in a perfectly competitive environment (using the characteristics of perfectly competitive markets).Include an explanation of what would happen if it received a favorable price for university products this year.

Hint: From the material below, remember what happens in a perfectly competitive market if the current price is greater than average cost (or producers are currently earning positive economic profits).

Key assumptions of the perfectly competitive market:

-The firm is a price taker (it must accept the market price)

-The firm makes the distinction between the short run and the long run

-The firm's objective is to maximize its profit (or minimize loss) in the short run

-The firm includes its opportunity cost of operations in its total cost of production

Pricing and Output Decisions in Perfect Competition

Perfectly elastic demand curve: consumers are willing to buy as much as the firm is willing to sell at the going market price.

-The firm receives the same marginal revenue from the sale of each additional unit of product; equal to the price of the product.

-There is no limit to the total revenue that the firm can gain in a perfectly competitive market

In the long run, the price in the competitive market will settle at the point where firms earn a normal profit over the long run.

-Economic profit invites entry of new firms

Shifts the supply curve to the right

Puts downward pressure on price

Reduces profits to normal levels

-Economic loss causes exit of firms

Shifts the supply curve to the left

Puts upward pressure on price

Increases profits to normal levels.

Perfectly competitive markets in action:

-the earlier the firm enters a market, the better its chances of earning above-normal profit for aperiod of time

-as new firms enter the market, firms must findways to produce at the lowest possible cost, or at least at cost levels below those of theircompetitors

-firms that find themselves unable to compete on the basis of cost might want to try competing on the basis of product differentiation

Lessons on perfectly competitive markets:

-It is extremely difficult to make money over thelong run.

-The firm must be as cost efficient as possible to survive.

-It might pay for a firm to move into a marketbefore others start to enter, but that is arisk--demand may not materialize.