Week 4

Question 1

what is the range of most competitive to least competitive market structure (4 of them)

Answer 1

• perfect competition
• monopolistic competition
• oligopoly
• monopoly

Question 2

the number of firms in the 4 different market structure

Answer 2

• perfect competition, infinitely many
• monopolistic competition, lots
• oligopoly, few
• monopoly, one

Question 3

what are the 4 assumptions of perfect competition

Answer 3

• many buyers and sellers
• perfect information
• homogenous product (selling the same products)
• no barriers to entry and exit

Question 4

does any action from a single buyer or seller affect the market in a perfect competition market structure ( 4 assumptions of perfect competition)

Answer 4

• infinitely many buyers and sellers, so any action is too small to affect the market

Question 5

how does perfect information lead to lots of price competition in a perfect competition market structure (4 assumptions of perfect competition)

Answer 5

• buyers and sellers know the market price
• therefore if a firm raises the price above market prices, the firm will lose all their customers

Question 6

how does homogenous product lead to no non-price competition (4 assumptions of perfect competition)

Answer 6

all firms produce the exactly same product
- therefore buyers will choose where to buy based solely on price

Question 7

how does no barriers to entry or exit control supply (4 assumptions of perfect competition)

Answer 7

• when there are super normal profits firms enter
• when firms are making a loss, some will leave the market
• therefore entry and exit controls supply by costing nothing to leave or enter

Question 8

in perfect competition are firms price takers, true or false

Answer 8

true

• because PED is perfectly elastic, it doesn’t make sense to charge more than market price lose all your customers,
• less than market price you would market more profit selling at market price

Question 9

What is the PED in a perfect competition market structure

Answer 9

Perfectly elastic

Question 10

how are profits effected for firms in the long-run in a perfect competition market structure

Answer 10

firms make only normal profits in the long-run
- supernormal profits
–> incentivises firms to enter the market
—> increasing market supply
—–> decreasing market price
——–> reducing profits
and repeat

Question 11

how are profits effect for firms in the short-run in a perfect competition market structure

Answer 11

in the short-run firms can make an economic loss
-> economic loss (profit below normal profit)
–> in the long-run firms leave the market
—> reducing market supply
—-> increasing market price
—–> increasing profits
still leads to normal profits made in the long-run

Question 12

why is the MR=AR=D curve horizontal in a perfectly competitive market

Answer 12

• derived from the market equilibrium price

Question 13

how can firms profit maximise on a graph

Answer 13

where MR = MC

Question 14

where is productive efficiency on a graph

Answer 14

productive efficiency is achieved by producing at the bottom of the AC curve

Question 15

productive efficiency definition

Answer 15

producing at the lowest possible average costs (AC)

Question 16

are perfectly competitive firms productively efficient in the long run

Answer 16

Yes, they produce at the bottom of the AC curve at a point where MR = MC = AC

Question 17

allocation efficiency definition

Answer 17

occurs where there is an optimal allocation of resources

Question 18

where does allocative efficiency occur on a graph

Answer 18

occurs where P = MC

Question 19

are perfectly competitive firms allocatively efficient in the long run

Answer 19

yes, P = MC at the point they price and output

Question 20

even though perfect competition is a theoretical concept why is it useful to use / compare

Answer 20

the closer an industry is to perfect competition, the closer it is to the efficiency results

in real competitive markets, competition encourages firms to be better
- reduce prices
- encourages firms to reduce costs
- improve service
- improve product

Question 21

when is perfect competition not allocatively efficient

Answer 21

when there are externalities present, private costs and benefits do not equate to social costs and benefits

MSB doesn’t equal MSC

Question 22

How does perfect competition not encourage innovation and invention

Answer 22

-> R&D promotes innovation and invention
–> which drives long-reun economic growth
—> firms make only normal profits
—-> little money for R&D
—–> perfect comp may not encourage innovation and invention
——-> may not drive long-run growth