7.1 & 7.2 Perfect Competition

Question 1

what dsitinguies each market

Answer 1

competition

Question 2

what are the three mechanism degree of competition is seen

Answer 2

number of firms
similarity of product
ease of entry and exit

Question 3

what occurs the greater degree of competition

Answer 3

• lower equilibrium prcie
  greater equilibrium quantity
  more efficient allocation of resources

Question 4

why are economists pro competition

Answer 4

as lowers prices to consumers and has greater efficiency

Question 5

what are three characteristics of perfect competition

Answer 5

1. There are many firms (and consumers)
   - Each has negligible fraction of total market share
   - No individual firm can affect supply
2. The firms produce a homogenous (standardised) product
   - Perfect substitutes
   - No brand loyalty
3. Free entry and exit in the long run
   - No barriers such as patents, copyrights

Question 6

what is price taker

Answer 6

Each individual firm (as makes up such small part of market) overall market demand and supply conditions sets the price, and each firm must accept that price

Question 7

in perfect competition, what does MR=, and what elasticity is demand curve

Answer 7

P

perfectly elastic

Question 8

how to get MR from TR slope

Answer 8

• change in TR/ change in Quantity= MR

Question 9

how to get MC from TC slop

Answer 9

change in TC/ change in Quantity=

Question 10

where does profit maximisation occur

Answer 10

• Profit maximisation occurs at MR=MC

Question 11

what is the supply curve in perfect comp

Answer 11

MC= supply (as MC determines how much willing supply)

Question 12

what is the profit maximising formula

Answer 12

Profit= (P-ATC) x Q

Question 13

what are the four short tun positions a firm finds themselves in

Answer 13

1. Pure economic profit (P >ATC)
2. Normal (zero) ep (P=ATC)
3. Economic/ quasi loss (P < ATC, but > AVC)
4. Shutdown (P < AVC)

Question 14

When working out Economic profit, what first thing do

Answer 14

where MC=MR

Question 15

in quasi loss, will firm continue to produce? why?

Answer 15

will produce in short run

- price still >AVC, // rev will cover variable costs + make some contribution to its fixed (sunk costs)

Question 16

why does firm shut down when MR < AVC

Answer 16

loss they make on making units > loss made if shut down and had NO variable costs (only paying fixed)

Question 17

how to work out (besides looking at graph that both ATC and AVC is above MR) to shutdown

Answer 17

• if economic loss is larger than fixed cost area (ATC-P x Q)

Question 18

why do firms in the long run receive 0 economic profit

Answer 18

positive profit = attracts new entrant increasing market supply and decreasing price
- short run losses= firms exit (firms exiting means supply curve shifts left + price back to normal profits _

Question 19

when firm enters or exits, what needs to happen to graphs

Answer 19

shift in supply curves

Question 20

what happens when preference shifts towards good

Answer 20

1. demand shift right
2. price increase and quantity increase
3. firms earn positive profit
4. attracts new firms shifting supply to right
5. will stop once price= original normal profit

Question 21

when preference moves toureds good, and both demand and supply shift rights, what happens to toal market output

Answer 21

increases

Question 22

difference between shut down and exit

Answer 22

Shut Down (to produce nothing for small time)
-	Short run  
       Firms cannot avoid fixed (rent land)  
-	This fixed= SUNK COST 

Exit (leave market)
- Long run
Firms can avoid fixed (i.e. sell land)
- Avoids sunk costs // too

Question 23

formulas for shut down and when to exit

Answer 23

Firm shuts down if:
TR < VC = P < AVC

Firm exits if:
TR < TC= P < ATC

Question 24

Where is firms short term supply curve

Answer 24

Firms short run supply curve is portion of marginal cost curve that lies above AVC

Question 25

where is firms long term supply curve

Answer 25

Firms long run supply curve is portion of marginal cost curve that lies above ATC