Zero Profits Conditions under Perfect Competitive Markets (Essay Sample)

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Zero Profits Conditions under Perfect Competitive Markets
Case 1
The notion of perfect markets occurs when there are numerous consumers of produced goods and producers of these good and services, and no single firm can influence the pricing. A perfect market is usually characterized by many buyers and sellers, homogeneous products, sellers and buyers have access to information about price, free entry, and no transaction cost (Vicentini, 2007).In this context, the owners of apartments want to maximize profits just like other competitors and so does the agencies in the market. In the short run, the agencies set the prices of their houses such that the marginal revenue equals the marginal cost and which is also equal to demand and price. That way the individual housing agencies can make economic profits. Due to free entry in the in the market and this context low transaction cost are required in becoming a real-estate agent, more agencies are attracted to the market, and so are the owner or real estates. While this is the case, the market share of profit reduces as prices remain constant, and that means that there is little left to share between the real-estate agencies. In the long run, the economic profit gets hard to sustain. The arrival of new agency firms in the market causes the demand curve of each housing firm to shift downward, bringing down the price, the average revenue, and marginal revenue curve. In the long-run, the real estates’ firms make zero profit. In that case, the horizontal demand curve intersects the average total cost at its lowest point.
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Case 2
The fact that there are no barriers to entry and exit of firms in a perfect market, more real-estate agencies usually enter the real- estate market with prospects of getting a share of the economic profit in the market (Casella, 2010). The prices in the market are determined by forces of demand and supply thus; no agent can influence the prices of the estates they are selling. In the long run, new agents are tempted into the real-estate markets when they realize that the existing agencies are earning positive incomes in the short term. In the long-term, as new entrants enter the real-estate markets, increased competition reduces all real-estate agency firms’ economic profits to zero. Thus in the long-run firm earns a regular profit. The competitive real-estate market like other firms in the perfectly competitive markets achieves its equilibrium when all firms are earning zero profits and when the number of companies in the market is constant. In case the, some of the estates agencies are unable to withstand the market pressure originating from other competitors, they are forced to withdraw from the market. Like in other perfect markets, agents of real estates can move out of the market freely at low transaction cost.
Case 3
In perfect a competitive market, the price of goods and services is determined by the market itself. In this case, the price of real estates is determined by the supply of real estates and the demand of such estates by customers. In the short run, the demand of real estates is usually high and the agents who already in the market at this time can set the prices of their products at whatever prices they want (Gale, 2000). The supply houses, on the other hand, are usually low boosting the market price of the housing prices. As the demand of estates continues to increase, so does the prices which attract other suppliers of housing product to the marke...