Perfect Competition

Question 1

What are the assumptions of the perfectly competitive market?

Answer 1

-Many buyers and sellers. Price takers who face a horizontal demand curve (AR=MR) -no barriers to entry or exit -perfect knowledge e.g. About production techniques and sources of raw materials -all firms aim to maximise profits

Question 2

What does the firm experience in the short run? Profit or loss.

Answer 2

Supernormal profits (price above average costs).

Question 3

What does the firm experience in the long run for industry and firm?

Answer 3

Industry: 1.Profit acts as a signal for new firms to enter the market (no barriers). 2.Industry experiences increase in supply. 3.Decrease in price & higher demand because of this. Firm: 1.Supernormal profits disappear. 2.Price falls & output too.

Question 4

How competitive is the perfectly competitive market?

Answer 4

It is the most competitive market possible.

Question 5

What happens when firms in the perfectly competitive market start making a loss?

Answer 5

1.Some firms leave (no barriers to exit). 2.Prices will rise but output for the individual firm also rises too. 3.This is because there are fewer firms in the market and each one makes up a little more.

Question 6

Draw the industry and firm diagrams for the short-run perfectly competitive market.

Answer 6

Question 7

Draw the industry and firm diagrams for a perfectly competitive market in the long run.

Answer 7

Question 8

Describe the situation where perfectly competitive firms make a loss and draw the diagrams.

Answer 8