Yr 2 Perfect competition

Question 1

In perfect competition- what are the assumptions, my guy? STATE IT ALL

Answer 1

Many buyers/sellers
Price takers from the market
Firms have very little power
Homogenous goods
Perfect information/factor mobility
no barriers to enter/exit
aim to profit maximise(P = MC)

Question 2

Draw the diagram for perfect competition in the long run

Answer 2

You should know this… check your book if you clapped

Question 3

What does the AR, MR, and TR curves look like in perfect competition?

Answer 3

Check your book bro but AR = MR = demand and TR is an upwards slope, as it’s always increasing by 1, because TR = P x Q

Question 4

Let’s say there is supernormal profit, wait, what is supernormal profit huhhhhhh?

Answer 4

The average cost is less than average revenue, profit made above normal profit

Question 5

Calm…. now explain why supernormal profit is a short-run phenomenon?

Answer 5

1)So… firm making supernormal profit
2)other firms see this, and they enter the market (low BTE)
3)They make a supernormal profit too because homogenous goods
4)Then prices fall because supply is increasing
prices fall back to where p = mc, as initially p>mc
5)Firms see this and wont join anymore
6)New AR line created

Question 6

Nice, draw that now you nerd, THE WHOLE THING

Answer 6

Check book thankssss

Question 7

The extra challenge, draw subnormal profit and explain why it shifts back in the LR on the diagram

Answer 7

Subnormal profit is where AC>AR
Profit is less than Normal profit
The explanation is the same as supernormal but the opposite

Question 8

When should a firm shut down?

Answer 8

When average variable cost is greater than average revenue, the firm cannot carry on in the long run as they won’t be able to afford it

Question 9

When can a firm just carry on?

Answer 9

When the Average variable cost is less than average revenue, their average cost may be higher than AR but their cost for every output is covered by AR, so they can carry on for a bit, so they could try something new and maybe get a profit or leave

Question 10

Draw the diagram for Loss no shutdown

Answer 10

what are you expecting to see here, check your book

Question 11

Draw the diagram for loss shutdown

Answer 11

Why do you keep checking thinking a diagram will just pop up?

Question 12

What’s the equation for AR, MR and TR?

Answer 12

MR = change in TR / change in Q
AR = TR / Q
TR = P X Q