3.4.2

Question 1

Explain how firms in perfect competition become allocativley efficent in the long run analysis + diagram

Answer 1

This is becuase in a perfectly competitive market there are no barriers to entry. As a result if spernormal profit is being made in the short run, this acts as a signal for new firms to enter the market. This will cause an outwards shift in market supply, which in turn leads to a level where price=ATC. In the long run a price taking firm will produce at an output where AR=ATC and where price=MC, leading to an allocativley efficent firm

price=mc in short run and lon run

Question 2

what are characteristics of perfect competiton?

6

Answer 2

• no/low barriers to entry
• price takers (elastic AR=MR)
• perfect knowledge
• homogenous goods
• normal profit in long run
• large nnumber of sellers

Question 3

how do firms in perfect competition achieve dynamic efficency?

Answer 3

the threat of competition may lead to a faster rate of technology diffusion as firms have to be responsive to changing consumer needs.

however, there are no supernormal profits made in long run, so nothing to invest. Furthermore, since goods are assumed to be homogenous there is little scope for innovation

Question 4

what are some evaluations of the perfect competition model?

Answer 4

• barrirs to entry such as patents and regulation are ignored
• in real world, dominance of differenciated/ branded products
• most consumers have imperfect knowledge and are influenced by persuasive marketing

Question 5

what is the short run shut down price in a competitive market?

Answer 5

when price>AVC

Question 6

when and why does a firm remain open in the short run if making a loss?

diagram + analysis

Answer 6

a firm can keep producing in the short run if price>AVC because they can make a positive contribution towards fixed costs

Question 7

when do firms shut down in the short run?

analysis + diagram + evaluation

Answer 7

when price< AVC. The losses from continuing are now higher than if the firm were to shut down pehaps temporarily

it does not always happen that production will shut down immediately as price falls below AVC. Firms may think there has been a temporary fall in demand or a short lived rise in costs which causes higher losses. They may be able to riase new debt or fresh equity to tide them over.Government financial support such as furlow scheme may also be avaibible in times such as pandemic.

Question 8

draw the perfect competiton diagram for long run

Answer 8

In the long run all firms are making normal profit

Question 9

draw a diagram for a firm in perfect competiton in the short run

Answer 9