What happens if in a perfect competition market a firm decreases the price of a commodity

Dear student

In perfect competition market, decrease in price of commodity will result in a rise in demand but because of opportunity costs and marginal costs, the firm is risking default i. e.  the rise will be short lived in a state of perfect competition because other firms will follow suit to lower their prices.

Hence, any firm that tries to lower its price (necessarily below its cost of production) may attract more demand at that time, but will be making losses (because revenues are not even covering costs) such that it would be unsustainable and will be forced to exit the market.

PS:-Perfect competition implies perfect knowledge for all competitors.


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