5 - Competitive Markets

Question 1

Characteristics of Competitive Markets

1. price taking (3)
2. product homogenity (3)
3. barriers (2)

Answer 1

• price taking | firm no influence on market price, many small suppliers, firm takes price as given, firm is adjusting output
• product homogenity | products of all suppliers are perfect substitutes from customer perspective, no individual preferences for products or suppliers, no differences in prices
• free markets entry and exit | no costs of entry and exit, no legal restrictions on hampering factors

Question 2

What is the contribution margin?

Answer 2

difference between revenue and variable costs of production = sum of differences between market price of each unit and average variable costs of each unit produced and sold = producer surplus

Question 2

What is the producer surplus?

Answer 2

sum of differences between market price of each unit and marginal costs of each unit produced and sold
- graphically: high until p, long until q, above MC
- calculating : alle P-MC addieren

Question 3

How can the aggregate supply on competitive markets be interpreted?

1. price earning
2. quantities
3. when price decreases
4. when price increases

Answer 3

• all companies earn same price
• companies produce different quantities (are of differing sizes) | inefficient companies with higher marginal costs are smaller
• reducing supply when prices decrease | companies produce less , less efficient companies leave the market
• increasing supply when prices increase | companies produce more | less efficient companies enter the market