perfect comp

Question 1

analysis short run

Answer 1

– The price that is charged by the firm, is not decided by the firm. The price is decided by the market forces of demand supply because there are so many firms in the market selling on homogenous products.

– The firm tries to set their price higher than the price determined by the market at P1

– This is because it is identical to competing
firms product sold at the equilibrium price.

-If the price is set too low, it would fail to make normal profit and might have to leave the industry. This explains the perfectly price elastic demand curve.

– In the short run, AR - AC is greater than zero .this is where the firm produces at the profit maximising quantity, where MR =MC

– This is where the firm makes the supernormal profit at the rectangle

this is only achievable in the short run, because there are no barriers to entry and firms produce homogenous products and compete on price

– Productive efficient, and allocative efficient

Question 2

Analysis long run

Answer 2

– in the long run, supernormal profits, incentivise new entrance to enter the market. This is possible because there are no barriers to entry on the goods that are sold are homogenous and single firm has price setting power

– New firms entering the market is shown by the right shift in supply from S1 to S2

– This causes a decrease in the price from P1 to P2, where MR2= AR2 = D2 which represents demand for the firms output

– AR - AC = P2 firms produce profit, maximising quantity MC = MR, which makes super normal profit

– Productive efficient (produces at min AC). and allocative efficient (price =MC)

Question 3

Evaluation points

Answer 3

dynamic efficiency
Demerit, good argument
creative destruction
Low prices for consumers
Productive and allocative efficiency