Week 6 - Perfectly Competitive Market

Question 1

Perfectly competitive market

Answer 1

A market that has:
- Many buyers and sellers, no one of which is large relative to the overall market.
- Sellers outputs being homogenous.
- Perfect information.
- Firms are price takers
- No barriers to entry or exit.

Question 2

Monopoly

Answer 2

There is only 1 seller, selling a given product

Question 3

Monopsony

Answer 3

There is only 1 buyer for a given product

Question 4

What happens to the number of firms in the short run in a perfectly competitive market

Answer 4

The number of firms stays the same as capital is fixed in the short run meaning firms cannot buy/sell the capital needed to enter/leave the market.

Question 5

Total Revenue (TR) formula

Answer 5

Total Revenue (TR) = price * quantity sold

Question 6

Average Revenue (AR) formula

Answer 6

Average Revenue (AR) = TR / quantity sold
Average Revenue = price

Question 7

Marginal Revenue (MR)

Answer 7

The additional revenue from selling 1 more unit of output

Question 8

Marginal Revenue (MR) formula

Answer 8

Marginal Revenue (MR) = dTR/dq
MR can be found by finding the rate of change of total revenue with respect to quantity sold.
MR = P = AR

Question 9

At what point do suppliers stop producing

Answer 9

Suppliers will keep producing until marginal revenue = marginal cost

Question 10

When is profit maximised

Answer 10

Max profit happens when p = MC or MR = MC

Question 11

Profit (π) formula (supernormal profit)

Answer 11

Profit = Total Revenue - Total Costs
π = TR - TC

Question 12

Normal vs Supernormal profit

Answer 12

Normal profit is when a firm is earning just enough to keep running.
Supernormal profit is when a firm is earning more than enough to keep running

Question 13

Shutdown conditions

Answer 13

If p < AVC, the firm should shut down as costs will be greater than profits, else, keep operating.

Question 14

Industry supply curve

Answer 14

It is the horizontal sum of individual firms’ supply curves.

Question 15

Qualities of equilibrium in the long run in perfect competition

Answer 15

• Free entry: firms can enter the industry without legal or technical barriers.
• All factors of production are variable - firms can enter (attracted by supernormal profits) or leave (due to losses) the market.
• Long run equilibrium occurs where market price = the minimum of average costs.
• At equilibrium firms earn no economic profit.