B2.01.08: Perfect Competition in the Short run

Question 1

Draw supernormal profit being made in the short run

Answer 1

Industry diagram:
- Normal D and S diagram with P1 extending across to the P1 on the firm diagram and Q1 drawn vertically from equilibrium point on industry diagram

Firm diagram:
- AC curve is a positive parabola
- MC curve is a nike tick
- D1=AR1=MR1 is a straight line cutting across 2 points on AC curve
- Find where AR = MC and draw a vertical line down and that is Q2, first second intersection when drawing the line and a line drawn horizontally is C1
- ABCP is total supernormal profit

Question 2

Define perfect competition

Answer 2

Perfect competition is where there are:
- Many firms that are small relative to the size of market
- These firms are price takers i.e. once the market determines the equilibrium price for the product, firms must accept this price
- Goods produced are homogenous
- Perfect info amongst consumers and producers
- These firms are profit maximisers hence, theres a perfect mobility of resources
- There’s free entry and exit

Question 3

What do the regions ABCP show

Answer 3

Total supernormal profit

Question 4

Where is the profit maximising point

Answer 4

Point A (where MR = MC)

Question 5

How to show supernormal profit per unit

Answer 5

Points AB (Ar - AC) multiplied by output BP

Question 6

6 Features of a perfectly competitive market

Answer 6

• Many firms that are small relative to the size of market
• These firms are price takers i.e. once the market determines the equilibrium price for the product, firms must accept this price
• Goods produced are homogenous
• Perfect info amongst consumers and producers
• These firms are profit maximisers hence, theres a perfect mobility of resources
• There’s free entry and exit

Question 7

Draw subnormal profit being made in the short run

Answer 7

Industry diagram:
- Normal D and S diagram with P1 extending across to the P1 on the firm diagram and Q1 drawn vertically from equilibrium point on industry diagram

Firm diagram:
- AC curve doesn’t touch D1=AR1=MR1 curve
- MC curve is a nike tick going through minimum point of AC curve
- Draw horizontally upwards from Point B (which aligns with point P1) until AC curve is touched and label A1 and draw vertically across and label C1
- ABCP is total subnormal profit (loss)

Question 8

one example of a perfectly competitive market

Answer 8

• foreign exchange markets (Forex)

Question 9

Define the long run

Answer 9

All FOP and costs are variable

Question 10

Define the short run

Answer 10

At least one factor of production is fixed