term 2 lecture 4 - perfect competition

Question 1

what is a market?

Answer 1

a system of buying and selling. two conditions must always be satisfied:
all trades must be voluntary and prices must be agreed by both sides to effect the trade

Question 2

what is market clearing?

Answer 2

when the demand is equal to the supply. the point at which is cleared is equilibrium

Question 3

what is the market type where sellers market power is zero

Answer 3

perfect competition

Question 4

what is the market type where sellers have limited selling power?

Answer 4

oligopoly

Question 5

what is the market type for which sellers has a strong amount of market power but multiple firms?

Answer 5

monopolistic competition

Question 6

what is the market type for which the seller has complete market power?

Answer 6

monopoly

Question 7

when buyers have the price setting power, what is the market type?

Answer 7

a monopsony

Question 8

what are the markets for whcih both sides have market power?

Answer 8

bilateral monopoly, bargaining, oligopsony

Question 9

what are the structural characteristics of perfect competition?

Answer 9

many suppliers/ firms and many buyers
identicial product ( no branding or brand loyalty
all information is known to everybody

Question 10

in the short run, what are the characteristics of the firm in perfect competition?

Answer 10

fixed costs whcih are also sunk costs

Question 11

in the short run what are the characteristics of the industry in perfect competition?

Answer 11

no new entry but shutdown can happen (no of operative frims can fall but cant increase
both entry and exit barriers exist. exit is costly

Question 12

in the long run, what are the characteristics of the firm in the perfect competition?

Answer 12

all costs are variable and there are no sunk costs

Question 13

in the long run, what are the characteristics of the industry in perfect competition?

Answer 13

there are no entry and exit barriers. any firms can come in and anyone can leave costlessly

Question 14

what are the individual firms supply desicion?

Answer 14

it has two decisions:
to produce or not to produce
if yes then how much to produce

Question 15

when the price is equal to the marginal cost, what is occurring to the marginal cost?

Answer 15

it must be increasing when the price is equal to marginal cost

Question 16

how does a firm decide whether it wants to produce or not to produce?

Answer 16

if the price is greater or equal to the average costs then the profit is positive so the firms should produce. if the producer surplus is positive, then the firm will choose to stay open in the short run. in long run, price must be at least equal to average costs

Question 17

what is the formula for producer surplus?

Answer 17

revenue minus the variable cost

Question 18

what is the shut down price in the short run?

Answer 18

the shut down price is price is equal to average variable cost in the short run. this is because if you shut down then the loss will be equal to the fixed cost, however if price is greater than variable cost, then the loss will be less than fixed cost so you should stay open. if the price is less than average variable cost though you should shut down as loss will be greater than fixed cost

Question 19

what is the effect of decreasing returns to scale?

Answer 19

decreasing returns makes firms small akin to capacity constraints which then allows price taking to be a consistent behaviour

Question 20

what does the price taking behaviour of the firm imply about the price?

Answer 20

the price taking behaviour of the firm implies that it must follow p=MC rule to decide how much it should supply. this means that its supply curve is always upwardward sloping regardless of short or long run

Question 21

for the industry, is the supply curve upward sloping?

Answer 21

the supply curve is upward sloping for the industry only in the short run

Question 22

what does welfare analysis relate to?

Answer 22

it relates to individual gains and losses and the overall social benefits and costs

Question 23

why do we call perfect competititon the ideal form of market?

Answer 23

because production is carried up to a point where the consumers marginal willingness to pay is equal to the societies marginal cost of production so there is no deadweight loss. social welfare is equal to the sum of consumer and producer surplus

Question 24

what is allocative efficiency in welfare terms?

Answer 24

marginal social benefit is equal to the marginal social cost