Final answer:
The five forces shaping market attractiveness are rivalry among current competitors, threat of new entrants, threat of substitutes, bargaining power of buyers, and bargaining power of suppliers. Perfect competition leads to firms earning zero economic profits in the long run due to the entrance and exit of firms establishing equilibrium. Firms in such markets calculate profits, consider the average cost curve for profits or losses, understand the shutdown point, and determine short-run production prices.
Step-by-step explanation:
The five forces which determine the intrinsic long-run attractiveness of a market or segment are crucial to understanding the competitive landscape and profitability potential. These forces include the level of rivalry among existing competitors, the threat of new entrants, the threat of substitute products or services, the bargaining power of buyers, and the bargaining power of suppliers. In a perfectly competitive market, firms are Price Takers with no market power, meaning they accept the market price determined by supply and demand.
Over time, if firms in a perfectly competitive market earn positive economic profits, this attracts new competition, leading to the entry of new firms. Conversely, economic losses lead to firms exiting the market. The entry and exit of firms will continue until the market reaches a long-run equilibrium, where no new firms want to enter, and existing firms do not want to leave, usually when economic profits are zero.
To make effective output decisions, perfectly competitive firms calculate profits by comparing total revenue with total cost, identify profits and losses with the average cost curve, understand the shutdown point, and determine the price at which they should continue producing in the short run. In the long run, adjustments lead to the alignment of price, average total cost, and marginal cost, resulting in firms breaking even.