market structures, perfect competition (L8)

Question 1

assumptions in the model of perfect competition (6)

Answer 1

firms aim to profit maximise
many participants (buyers & sellers)
homogeneous product
no barriers to entry or exit from the market
no perfect knowledge of market conditions
no externalities

Question 2

is a firm in perfect competition a price taker or maker?

Answer 2

price taker

Question 3

what type of demand would firms face and why?

Answer 3

perfectly elastic demand as if it sells at a price above the price it’s given, the firm sells nothing as buyers are aware of the market price and won’t buy for any higher than that

Question 4

at what point will a firm supply output?

Answer 4

where MC=MR

Question 5

what happens if the price falls below short run average variable cost?

Answer 5

the firm will most likely exit the market as it’s better off just incurring fixed costs so short run supply (SMC) must be above SAVC

Question 6

when there’s a shift in short run equilibrium, how can market equilibrium be restored in the long run?

Answer 6

when there’s more demand for a product, it means firms will make more profit which attracts firms- in perfect competition, there are no barriers to entry so firms can enter the market to gain profit but because of the increase in supply, price goes down again which reduces the supernormal profit to normal profit and vice versa fr subnormal profit