Mod 4 Pure Competition

Question 1

Describe demand to a competitive firm?

Answer 1

• cannot affect price, they are price takers
• sellers face a perfectly elastic demand curve, very sensitive to price changes
• demand schedule IS the revenue schedule because of this

Question 2

Explain average revenue, total revenue, marginal revenue?

Answer 2

AR is the total revenue per unit of a product sold (PxQ =P)

TR is total dollars received by firm from the sale of a product (TR=PxQ)

MR is additional revenue from the sale of an extra unit of out put or change in TR

Question 3

Represent this info on a graph.

See graph 8b

Answer 3

See graph 8b

Question 4

What is the MR=MC rule?

Answer 4

A form will maximise profit or minimise losses by producing at that point where marginal revenue = marginal costs

Question 5

Name 3 characteristics of the MC = MR rule?

Answer 5

• firms would rather produce than shut down
• MR =MC is profit maximisation in all markets
• competitive markets maximise at P= MC

Question 6

Reproduce graph 9 and 10

Answer 6

See graph 9 showing profit using mr-mc approach

Same agin but showing loss - graph 10

Question 7

MR = MC graph

Answer 7

See graph 10

Just shows short run ATC, MC, and AVC

Question 8

What are the 3 assumptions for profit maximisation in the long run?

Answer 8

1) entry and exit assumed to be the only long run adjustment
2) identical costs- assumed that all firms have similar cost curves
3) constant cost industry - assume that entry and exit will not affect costs of individual firms (hold this constant)

Question 9

Outcomes for the long run in competitive

Answer 9

Zero economic out put - also known as normal profit, or breaking even

Question 10

What are the characteristics of pure competition?

Answer 10

• very large number of sellers
• standardised (homogenous products)
• they are ‘price takers’ - no single firm can influence market price
• entry and exit is free
• absence of non- price competition

Question 11

How are benefits of new technologies passed on to consumers for free? Why is this bad news for investors in high tech firms?

Answer 11

This is to do with perfect competition and efficiency.