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Economics and Perfect Competition

You are a manager of a small US firm that sells nails in a competitive market (the nails are a standardized commodity; stores view your nails as identical to those available from hundreds of other firms). You are concerned about two events you recently about through trade publications:
(1) The overall market supply of nails will decrease by 2%, due to exit by foreign competitors
(2) Due to a growing US economy, the overall market demand for nails will increase by 2%

Based on this information, should you plan to increase or decrease your production of nails. Explain.

Solution Preview

Your company operates in a perfect competition. Because of this, you do not have any pricing power. Since nails are standard commodity, they are priced by the market. You decide how much to produce at that price so that your profits are maximized. This happens when your marginal cost equals the market price of nails.

(1) If the market supply of nails will decrease, the supply ...

Solution Summary

This solution discusses changes to quantity supplied for a small firm based on the effects of changes in overall market supply and overall market demand. This solution is 263 words.