Perfectly Competitive Markets

Question 1

Characteristics

Answer 1

Lots of buyers and suppliers
Price takers
Products are homogenous
Perfect knowledge
No barriers to entry
Firms at profit max position = MC=MR

Question 2

Where does the Marginal cost curve always hit…

Answer 2

The Average Cost at the LOWEST point

Question 3

Reason for being price takers:

Answer 3

As their are so many firms the market share of each is very small. If they increased the price of their product they would lose money as customers would choose the cheaper product. This means demand is perfectly elastic.

Question 4

Loss minimisation in the short run: a firm can only product at a loss in the short term providing it covers its…… Costs.

Answer 4

Fixed

Question 5

Loss minimisation in the short run: where does the AC curve go?

Answer 5

Above the AR LINE

Question 6

Loss minimisation in the short term: what happens in the long term

Answer 6

Firms leave the market, as barriers are low, and the loss will return to Normal Profit.

Question 7

Short term profit maximisation: reason for a super normal profit being SHORT TERM:

Answer 7

As there is perfect knowledge people can see this and enter the market, as barriers are low. This being they will copy what the other firm is doing however as there are more suppliers the price will drop.

Question 8

Short term profit maximisation: what happens to the MR/AR CURVE?

Answer 8

It drops in the long run

Question 9

Graph

Answer 9

This is the grap