Perfect Competition

Question 1

What are the factors used to determine market structure?

Answer 1

• Number of firms
• product differentiation
• ease of entry / barriers
• extent to which information/ knowledge is perfect
• influence of individual firms / suppliers on price

Question 2

What are the objectives of a firm ?

Answer 2

• Profit maximisation
• sales maximisation
• revenue maximisation
• growth maximisation
• market share
• corporate social responsibility
• quality

Question 3

What is the divorce of ownership and control?

Answer 3

The owners and those who manage the firm are different groups and have different objectives. Only applies to PLCs

Question 4

What is the principal agent problem?

Answer 4

The principal (owner) appoints an agent (manager) to perform tasks on their behalf
The incentives of the owner may differ from those of the manager

Question 5

How do you cope with the principal agent problem?

Answer 5

• Employee share - ownership scheme
• shareholder activism
• delist (buy all shares back)

Question 6

What did Galbraith theorise about shareholders?

Answer 6

They are happy with reasonable profits which leads to Satisficing due to imperfect information

Question 7

What are the features of a perfectly competitive market?

Answer 7

• Many small firms
• homogeneous goods
• all firms are price takers
• perfect knowledge
• freedom of entry / exit
• Large number of buyers
• factors of production are completely mobile

Question 8

What are barriers to exit?

Answer 8

Sunk costs which are the start up costs you can’t get back
e.g. market research (can’t sell it on)

Question 9

What are the statements to remember about the graphs showing the market and firms?

Answer 9

1. We assume that all firms are short run profit maximisers - this occurs at Q when MC = MR
2. Q, shows where output is (determined by marginals) to read profit you use averages
3. This firm makes normal profit - this is because at Q AC is equal to AR

Question 10

Why does MR = P on a firm graph?

Answer 10

It is the addition to the total revenue of selling one extra unit of a good, since the price is always the same, p=mr. The addition is always p

Question 11

What would a firm do if they were making a sub normal profit?

Answer 11

They would leave the market as they have no barriers to exit and perfect factor mobility

Question 12

What happens if a new firms enters a perfectly competitive market?

Answer 12

A new form entering a supernormal profit market is not advantageous for the old firm • they produce less as Q1 is shifted left.
Supernormal profit attracts new firms in the market (incentives them)

Question 13

What is supernormal profit?

Answer 13

Where AC is lower than AR - occurs in the long run

Question 14

When is the graph productively and allocativeley efficient ?

Answer 14

Q is productively efficient as it is the lowest AC
Allocative efficiency occurs at Q where P = MC

Question 15

What happens when P is greater than MC?

Answer 15

Allocative inefficient signals to the firm to make more, consumes value the good at P. The MC of that good is less

Question 16

What happens when P is less than MC?

Answer 16

Allocative inefficiency signals to the firm to make less, consumes value the good at P. The MC of that good is more

Question 17

Does a perfectly competitive firm have the means for dynamic efficiency?

Answer 17

No they do not
They also might

Question 18

Does a perfectly comp market have the incentive for dynamic efficiency?

Answer 18

Doesn’t - woulcht have the incentive for de because Q falls to Q1 and therefore P shifts down to PI eliminating supernormal profit
Does - perfect comp firm = supernormal profit in the short run as long as the red box P-AC exists there is incentive. Supernormal profit is the incentive.in the short run

Question 19

Where does sales Max occur?

Answer 19

At Q when AC = AR

Question 20

Where does Rev max occur?

Answer 20

Mr = 0

Question 21

Where does CSR occur?

Answer 21

Doesn’t as they have no means and no incentive