Perfect Competition

Question 1

Characteristics

Answer 1

Many buyers and Sellers
Goods are homogenous
No barriers to entry / exit
Firms are price taker not price makers

Question 2

Equililibrium price is p1 and the output of the industry as a whole is q1

Answer 2

Many sellers are selling homogenous products and customers know this due to perfect knowledge. Firms have no ability to charge above p1

Question 3

If the firms charge over p1 they would lose customers

Answer 3

Demand is perfectly price elastic at the market price. Demand / Average revenue is hortizontal

Question 4

Firms can sell as many units as it wants at this price

Answer 4

Firms doesn’t have to cut price to increase sales volume. P1 equals the marginal revenue for each unit

Question 5

Marginal cost curve cuts the Average Cost at the lowest point

Answer 5

Making the firm to be productively efficient

Question 6

As a profit maximiser

Answer 6

The firm will produce where MR equal MC which is q1

Question 7

At q1

Answer 7

The price p1 is equal to MC meeting the techincal condition for Allocative efficiency

Question 8

Economic profit acts as a signal to new firms to enter the market

Answer 8

Due to absence of barrier to entry causing the market supply to shift to the right from s1 to s2 and lowering price to p2

Question 9

Firm product shift downwards to D2=AR2=MR2

Answer 9

Firm profit maximise by producing where MR=MC and at a new price of p2 and firm new output of q2

Question 10

Firms return to its long run equilibruim position with

Answer 10

Total revenue and total cost both equal to 0P2Eq2

Question 11

Economic profit has been competed away

Answer 11

Hit and run entry (if firms subsequently leave)