Market structures

Question 1

What are the assumptions of perfect competition?

Answer 1

-no externalities since perfect market
-perfect knowledge (anyone can leave or enter as they know the situation of the market)
-many buyers and sellers
-no barriers to entry/exit
-firms aim to maximise profit
-product is homogenous (no difference in products so no one has market power)

Question 2

Why can firms only make supernormal profit and losses in short run?

Answer 2

Due to perfect knowledge, firms can leave if there are losses being made and enter if supernormal profits are made but eventually it will turn into normal profit in the long run

Question 3

Why is the demand curve horizontal?

Answer 3

Firms are price-takers so demand is perfectly price elastic so price level is fixed

Question 4

What does it mean for society, if all perfect competition’s assumptions were fulfilled?

Answer 4

This would be the best allocation of resources.

Question 5

What is a firm

Answer 5

An organisation that brings together FoPs in order to produce output

Question 6

Why is labour derived demand?

Answer 6

Firms do not demand labour for their own sake but for generating revenue

Question 7

What are the factors that can affect the demand curve for labour?

Answer 7

-changes in productivity
-changes in price of good labour produces
-changes in demand of the good labour produces
-changes in the price of capital

Question 8

Why does an increase in wage rate lead to an increase in demand for leisure?

Answer 8

The income effect is stronger, assuming leisure is a normal good so demand for leisure increases

Question 9

What are movements on labour demand curve caused by?

Answer 9

Changes in wage rate

Question 10

What are fringe benefits?

Answer 10

Firms providing other benefits that aren’t reflected in wages eg pension schemes and job security