Competitive markets

Question 1

price taker d

Answer 1

a firm that has to accept the price ruling in the market

Question 2

what are the assumptions of perfect competition (7)

Answer 2

large no. of buyers and sellers
perfect knowledge
homogeneous products
freedom of entry and exit
mobile factors of production
no-one large enough to affect market price
readily available information

Question 3

explain assumption about large number of buyers and sellers in PC

Answer 3

ensures the product is sold and the firm is a price taker

Question 4

explain assumption about no-one large enough to affect market price in PC

Answer 4

no one firm or buyer is large enough to affect the market price

Question 5

explain assumption about perfect knowledge in PC

Answer 5

buyers and sellers have perfect knowledge of the product and prices

Question 6

explain assumption about homogeneous products in PV

Answer 6

all products are the same

Question 7

explain assumption about freedom of entry and exit in PC

Answer 7

any firm can enter or leave the industry as there are no barriers, if they do not make normal profits they can use their factors of production elsewhere

Question 8

explain assumption about readily available information in PC

Answer 8

firms have equal access to technological improvements so are unlikely to invest in R&D

Question 9

explain assumption about mobile factors of production in PC

Answer 9

factors can undertake any types of work in any location

Question 10

for perfect competition what does the graph look like for the individual firm

Answer 10

straight horizontal line (D=AR=MR=P)

Question 11

what are firms in perfect competition called

Answer 11

price takers

Question 12

homogeneous product d

Answer 12

all products are the same irrespective of who makes them

Question 13

allocative efficiency d

Answer 13

the optimum allocation of scarce resources that best accords with the consumer’s pattern of demand

Question 14

why can’t there be long run supernormal profits in the long run (perfectly competitive)

Answer 14

if one firm experiences supernormal then other firms will enter until the profits are competed away

Question 15

when is a firm making normal profits, when what equals what

Answer 15

when AR = ATC

Question 16

optimum output d

Answer 16

combination of fixed and variable factors that minimises ATC

Question 17

statistically efficient d

Answer 17

both allocatively and productively efficient at a point in time

Question 18

what does perfect competition imply about a firm

Answer 18

it won’t grow large enough to exploit economies of scale however it will result in an efficient allocation of resources

Question 19

dynamic efficiency d

Answer 19

efficiency over time, new products, techniques and processes

Question 20

why would firms in a perfectly competitive market be unlikely to reach dynamic efficiency

Answer 20

without being able to protect their investment and earn supernormal profits it is unlikely that they will invest in the R&D necessary to achieve dynamic efficiencies

Question 21

talk about firms making losses in perfectly competitive

Answer 21

if firms making losses some will leave supply to left which will lead to normal profit

Question 22

explain the relationship between shutting down and the AVC (average variable cost)

Answer 22

if the price is above the AVC then it pays for the firm to close down slowly because it is offsetting some of the fixed costs

Question 23

explain relationship between shutting down and the fixed costs

Answer 23

they must be paid whether the firm produces or not so even if they are making a loss if they shut down immediately then all the fixed costs would have to be paid out of the owners pockets

Question 24

when will a firm in perfect competition shut down

Answer 24

when price falls below AVC as it can’t pay for labour and raw materials let alone fixed costs