Perfect Markets

Question 1

What is a market

Answer 1

An institution or mechanism that brings together buyers and sellers

Question 2

What is marginal cost

Answer 2

The extra amount of by which total cost increases when an additional unit is produced
Change in total cost / change in output

Question 3

What is marginal revenue

Answer 3

The extra amount of income received when an additional unit of a product is sold
Change in total revenue / change in output

Question 4

What is average cost

Answer 4

Total cost / Total output

Question 5

What is average revenue

Answer 5

The average amount the firm earns for every unit sold
TR / Q = AR
TR = PQ
AR = PQ / Q
AR = P

Question 6

What is Average variable cost

Answer 6

Variable cost divided by the number of units produced
VC / TO = AVC

Question 7

What is price

Answer 7

A value that will purchase a definite quantity, weight or other measure of a good or service

Question 8

What is quantity

Answer 8

The extent, size or sum of countable or measurable discrete events, objects or phenomenon expressed as a numerical value

Question 9

What is economic cost of production

Answer 9

Economic cost of production = Opportunity Cost = Explicit cost + Implicit cost

Question 10

What is explicit cost

Answer 10

The actual expenditure of a business on the purchase of the inputs for the production process

Question 11

What is implicit cost

Answer 11

The value of inputs that are owned by the entrepreneur and used in the production process

Question 12

Give 3 examples of implicit costs

Answer 12

Rent that could have been earned if the owner used his own building
Interest that could have been earned if the owner invested their own money
Salary that the owner could have earned if they had worked elsewhere

Question 13

Describe Perfect Competition

Answer 13

A market structure with many participants who are all price takers, there are no entry or exit barriers in the long run, all information is available to both the buyers and sellers and a homogeneous product is sold

Question 14

Give 3 examples of perfect competition

Answer 14

Stock exchange
Foreign currency market
Central grain market

Question 15

What are the 9 characteristics of perfect competition

Answer 15

Many buyers and sellers
Homogenous product
Freedom of entry / exit
Mobility of factors of production
Perfect information
No collusion
Unregulated market
No preferential treatment
Efficient transport and communication

Question 16

What is demand curve of an individual business in perfect competition

Answer 16

It is horizontal

Question 17

What is the demand curve of the industry in perfect competition

Answer 17

It is downward sloping

Question 18

What should a firm do when MR > MC

Answer 18

Output should increase

Question 19

What should a firm do when MR = MC

Answer 19

Nothing - Profit is maximised

Question 20

What should a firm do when MR < MC

Answer 20

Output should be reduced

Question 21

Where is profit maximised

Answer 21

Where SMC = MR

Question 22

Where is the industry in equilibrium

Answer 22

At a price that clears the market
Where quantity demanded = quantity supplied

Question 23

Why do businesses not make economic profit in the long term

Answer 23

Businesses that make economic profit in the short term will have to expand their plant size, because of this economic profit, more businesses will be attracted to the industry
Businesses that make losses and who are unable to adjust their business will have to close in the long run

Question 24

Look at table pg 19 and 20

Answer 24

**

Question 25

What is allocative / Pareto efficiency

Answer 25

Where goods and services are allocated in the most efficient manner possible

Question 26

What is productive efficiency / technical efficiency

Answer 26

The production of goods and services in the least costly way and without wasting scarce resources

Question 27

What is normal profit

Answer 27

The minimum earnings required to prevent the entrepreneur from closing the business and using his factors of production elsewhere

Question 28

What does the SAC curve being tangent to the demand curve mean

Answer 28

P / AR = SAC (TR = TC)

Question 29

What is economic profit

Answer 29

Profit made in addition to normal profit

Question 30

What is the shutdown-point

Answer 30

Where marginal costs = AVC

Question 31

What can change in the long-run

Answer 31

New businesses can enter or leave the market
All factors of production become variable and existing firms earning economic profit in the short run may decide to expand their plant size to realise economies of scale

Question 32

Where does price settle in the long-run

Answer 32

At the lowest point on the SAC curve

Question 33

Read pages 24 and 25

Question 34

What happens once long term equilibrium is achieved

Answer 34

There will be no further entry or exit of businesses

Question 35

What is competition policy

Answer 35

Competition policy wants to promote competition and prevent the abuse and exploitation of economic power and instead exploit the advantages of healthy competition to the benefit of society

Question 36

What are the 9 aims of competition policy in south africa

Answer 36

Prevent the abuse of economic power
Regulate the growth of market power
Prevent restrictive practices, particularly by oligopolies
Contribute to the developmental objectives of the state
Improve efficiency of the markets through legislation
Improve equity in the markets
Protect the consumer against unfair prices and inferior products
Prevent price fixing
Promote competition

Question 37

What are the 3 legal firms in place to ensure competition

Answer 37

Competition commission
Competition tribunal
Competition appeal court

Question 38

Read through bottom of pg 26 and whole of pg 27