Today's Question
Perfect competition has many small firms selling identical products, with no barriers to entry. Each firm is a 'price taker' - it can't influence the market price. Why can't a wheat farmer raise their price even 1% above the market price? And why do economic profits tend toward zero in perfectly competitive markets over time?
Model Answer
Can't raise price: Wheat is identical across farms. If you charge more, buyers instantly switch to the (many) other farmers charging market price. You'd sell nothing. Profits go to zero: If farms are profitable, new farmers enter, increasing supply, which drives prices down. If farms lose money, some exit, reducing supply, which drives prices up. Entry/exit continues until price equals average cost (zero economic profit).