Merits of Perfect Competition - Part 2 -
May 27th, 2009
3. Shut-down Point: It is of utmost importance to decide whether one should continue business or not when the firm is not in a position to cover the cost.
To explain this problem a distinction is made between variable cost and fixed cost. Variable cost is avoidable cost by not producing the goods and services. Fixed cost is unavoidable since it has to be borne in the short-run even if the plant remains closed. A firm has to cover what is avoidable otherwise there is no reason why the entrepreneur should suffer the loss. The principle derived here is that for a firm to operate in the short-run its total revenue(TR) must be equal to its variable cost (TVC) if not, the firm should close down. The shut down point is the one below which the firm would not operate and would start functioning at that point. In the long-run it must be noted that all costs are variable, therefore a firm must cover all the cost and earn normal profit.
4. No Entry Barriers: Perfect competition is a highly efficient form of market. To ensure efficiency through competition , anyone who wishes to carry on the business must be allowed to do so. Similarly one who feels that he cannot compete and therefore wants to quit must have the freedom to exit.