Assume you read in a newspaper that firms who produce baby milk are not doing well due to melamine case. With the theory of perfect competition in mind, what do you expect to happen to the baby milk prices? Will the firms able to make profits in long run?
Given the information that firms producing baby milk are not doing well due to a melamine case, let's analyze the effects on baby milk prices and the potential for firms to make profits in the long run, considering the theory of perfect competition.
In perfect competition, there are a large number of buyers and sellers who produce identical products, with no barriers to entry or exit. In this scenario, the following outcomes can be expected:
1. Baby Milk Prices: With the melamine case affecting multiple firms, the supply of baby milk may decrease due to certain firms exiting the market or reducing production. This reduction in supply could lead to an increase in prices as demand remains unchanged. Other firms may also adjust their pricing strategies to compensate for any potential costs associated with increased safety measures or potential lawsuits.
2. Competition and Profits: In the long run, in a perfectly competitive market, existing firms can only earn normal profits. Normal profits refer to the minimum level of profit necessary to cover all costs associated with production, including the opportunity cost of capital. In a perfectly competitive market, new firms can freely enter the market if they see an opportunity to make above-normal profits. However, in this case, the melamine case may discourage new entrants or lead to stricter regulations, making it challenging for new firms to enter the market easily.
Considering the principle of perfect competition, the negative implications of the melamine case could result in higher prices for baby milk due to decreased supply. However, it is important to note that this is a hypothetical analysis based on the assumption of perfect competition. The actual market dynamics may vary depending on various factors, such as government intervention, consumer behavior, and brand loyalty, which can influence prices and firm profitability.