Market Structures

Question 1

Give 5 characteristics of Perfect competition

Answer 1

1. Extremely large number of buyers and sellers(theoretically infinite)
2. Goods are homogeneous- no advertising
3. Single price-Price taker
   4.Perfect knowledge(price,quality,rivals)
4. Transport costs are ignored
5. Firms aim at profit maximisation or loss minimisation
6. Freedom of entry and exit
   8.Perfect mobility

Question 2

How is prices determined in a perfect competition

Answer 2

1. Prices are determined by mkt forces of dd and ss by the industry.
2. Price determined will be price accepted by all firms as they are price- takers and lack monopoly power.
3. Hence dd curve will be perfectly elastic.
   No individual firm can change the price.

Question 3

Equilibrium of firms in the short runPC

Answer 3

Firms are in equi when profits are maximised or losses is minimised
In the SR, firms can make SNP or losses.

Question 4

Where do firms operate if they want to maximise output PC

Answer 4

Where MC=MR and Mc is rising
because lower MC will incentivise firms to keep on expanding output
while higher Mc will lead to a contraction in output

Question 5

How are the diagrams for short run equilibrium in perfect markets

Answer 5

DRAW IT

Question 6

Define supernormal profit

Answer 6

Profit over and above what is needed to keep resources in their present use in the LR

Question 7

Define normal profit

Answer 7

Minimum profit required to keep resources in their present use in the long run.

Question 8

1.When is a firm making a SNP
2.When is a firm making NP
3. When is a firm making a loss

Answer 8

AR greater than AC
AC=AR
AR less than AC

Question 9

Are firms efficient in the SR

Answer 9

price=MC
allocatively efficient

Question 10

When should a firm close down in the short run.

Answer 10

Loss less than Fc- continue
Loss greater than FC- close down

price greater or equal to AVC- continue
price less than avc- close down

Question 11

What is the short run ss curve of the firm

Answer 11

part of the mc lying the AVC
upward sloping- higher price will expand output as it will allow the producer to ss more, reduce loss and eventually make a profit

Question 12

Equilibrium in the long run

Answer 12

All loss-making firms will leave mkt if AC is not covered.
SNP will attract new firms, ss rise, price fall, cost rise until snp is eroded

Question 13

Type of profit made in the long run

Answer 13

Normal profit
AR = AC

Question 14

are firms efficient in the long run in PC

Answer 14

1. allocative- P=MC
2. Productive - AC=MC [min point of ac curve]
3. operate at MES- full adv of EOS none of DEOS
4. No dynamic efficiency due to lack of SNP

Question 15

When is the industry in equilibrium

Answer 15

1. Constant returns to scale- prevent existing firms to contract or expand
2. Normal profit- no new firm enter or existing leave

Question 16

What does it mean when the industry is in equilibrium

Answer 16

no tendency for industry to expand or contract

Question 17

What is LR SS CURVE OF THE FIRM

Answer 17

at least make a normal profit
MC curve lying above AC

Question 18

SS curve of the industry in PC

Answer 18

industry ss is total ss of all goods by each firm at each price
horizontal summation of ss curves[mc] of the firms in the industry