Chapter 7 - Pure Competition

Question 1

What are the four market models in economics?

Answer 1

Pure Competition, Monopolistic Competition, Oligopoly, Pure Monopoly

These models differ in terms of the number of firms, product differentiation, and barriers to entry.

Question 2

What characterizes Pure Competition?

Answer 2

Very large number of firms, homogeneous product, easy entry into market, no control over price

Examples include agriculture.

Question 3

What characterizes Monopolistic Competition?

Answer 3

Many firms, differentiated products, relatively easy entry, some control over price

Examples include retail and clothing.

Question 4

What characterizes Oligopoly?

Answer 4

Few firms, standardized or differentiated products, significant obstacles to entry, some control over price

Examples include cars and bank services.

Question 5

What characterizes Pure Monopoly?

Answer 5

One firm, unique product, completely blocked entry, considerable control over price

An example is Eskom.

Question 6

What is a homogenous product?

Answer 6

A product that is identical to other products, indistinguishable from one another from the buyer’s perspective

Examples include basic agricultural products.

Question 7

What is a heterogenous product?

Answer 7

Similar products that can be distinguished from one another due to brand or quality

Examples include branded clothing.

Question 8

What is the demand curve for a purely competitive firm?

Answer 8

Horizontal and perfectly elastic at the market price

This means the firm is a price taker.

Question 9

What is Marginal Revenue (MR) in pure competition?

Answer 9

MR equals the price of the product

In pure competition, each additional unit sold increases total revenue by the price.

Question 10

How can a firm maximize profit in the short-run under pure competition?

Answer 10

By adjusting output to where MR equals MC

The firm must ensure price is equal to or greater than average variable cost.

Question 11

What is the formula for calculating Economic Profit?

Answer 11

Economic Profit = (Price - Average Total Cost) x Quantity

This calculates the per-unit profit multiplied by the number of units sold.

Question 12

What is the break-even point?

Answer 12

The level of output where total revenue equals total cost

At this point, the firm makes a normal profit, not an economic profit.

Question 13

True or False: In pure competition, firms can influence the market price.

Answer 13

False

Firms have no significant control over the price.

Question 14

What is the condition for a firm to continue producing when facing losses?

Answer 14

If the loss is less than the fixed costs of shutdown

The firm should produce as long as it can cover its average variable costs.

Question 15

In the MR/MC approach, what should a firm do if MR is less than MC?

Answer 15

The firm should not produce that unit

This indicates that the costs of production exceed the revenue generated.

Question 16

Fill in the blank: In pure competition, the firm’s demand is equal to _______.

Answer 16

Marginal Revenue (MR) and Average Revenue (AR)

D = MR = AR under pure competition.

Question 17

What happens when a firm produces at a level where MC exceeds MR?

Answer 17

The firm will incur losses

It indicates that producing additional units adds more to costs than to revenue.

Question 18

What is the relationship between Average Revenue and Price in pure competition?

Answer 18

Average Revenue equals Price

This is because the price per unit is the same as revenue per unit.

Question 19

What is the significance of the market structure in which a business operates?

Answer 19

It influences how the business sets prices and decides on levels of output

Different market structures have varying levels of competition and barriers to entry.

Question 20

What is the condition for a firm to minimize its losses?

Answer 20

MC = MR

Question 21

How is total loss calculated?

Answer 21

Total loss = (A – P) x Q

Question 22

At what price should a firm shut down?

Answer 22

When AVC is greater than the price

Question 23

What happens to the firm’s output if the price is below the minimum AVC?

Answer 23

Quantity supplied will be zero

Question 24

What is the relationship between price and quantity supplied?

Answer 24

Quantity supplied increases as price increases.

Question 25

What happens when the price is equal to minimum ATC?

Answer 25

The firm earns a normal profit

Question 26

What does the firm's supply curve represent?

Answer 26

The portion of the MC curve above the AVC curve.

Question 27

What is the impact of a decline in demand on the number of firms in the market?

Answer 27

Firms will exit the market, reducing supply.

Question 28

What is the characteristic of a constant-cost industry?

Answer 28

Entry and exit of firms does not affect resource prices.

Question 29

What shape does the long-run supply curve of a constant-cost industry take?

Answer 29

Horizontal ## Footnote This indicates that supply is perfectly elastic.

Question 30

What occurs in an increasing-cost industry as firms enter the market?

Answer 30

Production costs increase, shifting ATC curves upward.

Question 31

What is the long-run supply curve like in a decreasing-cost industry?

Answer 31

Downward-sloping.

Question 32

What is the concept of productive efficiency?

Answer 32

Producing goods in the least costly way.

Question 33

What is allocative efficiency?

Answer 33

Resources are used to produce goods that are most wanted by society.

Question 34

What guarantees allocative efficiency in a competitive market?

Answer 34

P = MC.

Question 35

What is consumer surplus?

Answer 35

The difference between the maximum price consumers are willing to pay and the market price.

Question 36

What does P = MC signify in economics?

Answer 36

It signifies allocative efficiency ## Footnote Allocative efficiency occurs when the price of a good equals the marginal cost of producing it.

Question 37

What happens to price and marginal cost for output levels below Q?

Answer 37

Price exceeds the marginal cost of production ## Footnote This indicates that the units are more valuable to consumers than the cost to produce them.

Question 38

Define consumer surplus.

Answer 38

The difference between the maximum prices consumers are willing to pay and the market price ## Footnote Consumer surplus is represented by the area between the demand curve and the equilibrium price.

Question 39

In a supply and demand graph, what does the purple triangle represent?

Answer 39

Consumer surplus (CS) ## Footnote It is the sum of the vertical distances between demand and the equilibrium price.

Question 40

Define producer surplus.

Answer 40

The difference between the minimum prices producers are willing to accept and the market price ## Footnote Producer surplus is the area between the supply curve and the equilibrium price.

Question 41

What does the green area in the graph represent?

Answer 41

Producer surplus (PS) ## Footnote At equilibrium quantity Q, consumer surplus and producer surplus are maximized.

Question 42

What are dynamic adjustments in an economic context?

Answer 42

Changes in consumer tastes, resource supplies, or technology ## Footnote For example, increased popularity of avocados can shift demand, affecting prices and efficiency.

Question 43

What occurs when the price of avocados increases due to higher demand?

Answer 43

Price exceeds marginal cost, leading to inefficiency ## Footnote Economic profits attract firms to the industry, causing expansion until allocative efficiency is restored.

Question 44

How do producers correct inefficiencies in resource allocation?

Answer 44

By reallocating resources until P = MC ## Footnote This adjustment aims to restore efficiency in the market.

Question 45

Fill in the blank: Consumer surplus is represented by the _______ triangle.

Answer 45

purple

Question 46

True or False: At equilibrium quantity Q, the combined amount of consumer surplus and producer surplus is minimized.

Answer 46

False ## Footnote It is maximized at equilibrium.