4.3 Competitive markets

Question 1

In perfect competition all products are…

Answer 1

Identical/homogeneous

Question 2

Why would it make no sense for a firm to sell above or below the market price?

Answer 2

Above - no sale- people would go elsewhere

Below - no sense - loss of potential profit and wouldn’t have enough supply to comply with makrye demand

Question 3

In a competitive market if products are homogeneous (identical) what does this mean for competition and brand loyalty?

Answer 3

Means firms are unable to change their prices beyond their competitors and there is no brand loyalty

Question 4

What does the diagram for a competitive market look like?

Answer 4

Firm - horizontal line at the price because D=AR
Market - supply and demand

The line for the price a firm sells at depends on the equilibrium point of the market

Question 5

What happens if a competitive market becomes less competitive?

Answer 5

• Firms see profit at price p1
• New firms enter the market
• Supply Increases
• Resulting in a drop in price

This results in the market remaining competitive.

Question 6

In highly competitive markets how do firms produce?

Answer 6

Customer demand - because if the firms doesn’t produce then other will which leads to consumer sovereignty - consumer is king