18. Perfect Competition (3)
1. Complete the following table
Type of Efficiency
Definition
Condition
Productive
P (AR)=MC
Abnormal profits give scope for reinvestment and funding for research,
development and innovation.
2. Perfect Competition and Economic Efficiency
2.1 Produce perfect competition diagrams for the short and long-run (use separate diagrams, drawn overleaf).
2.2 Using the table in Question 1, decide which types of efficiency are achieved under perfect competition in the
short and long run.
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3. Multiple Choice
Question
3.1
3.2
3.3
Possible answers
Which of the following markets best resembles the
model of perfect competition?
A firm in short-run equilibrium under the model of
perfect competition will
Supernormal profits in the model for perfect
competition are only possible in the short-run
because in the long-run
A
Motorcycle manufacturing
B
Foreign exchange market
C
Telephone services
A
Make only normal profit
B
Cover only their fixed costs
C
Be productively inefficient
A
Regulators will reduce prices
B
New firms enter the market
C
Firms engage in advertising
Ans
4. Firms facing difficulty
You have just started work at a firm in a perfectly competitive market. The manager is a little distressed, as the firm
is currently making a loss. He shows you the firms cost and revenue diagram:
Price
MC
E
P1
Q1
AC
AVC
4.1 Highlight the area of loss on the
diagram.
4.2 What does the vertical distance
D=AR=MRbetween AC and AVC represent?
____________________________
Output
_____________________________
___________
www.a-zbusinesstraining.com
4.3 The manager asks you if you think
www.a-zbusinesstraining.com
18. ANSWERS: Perfect Competition (3)
1.
Type of Efficiency
Definition
Where a firm produces at the lowest
point on its average cost curve and
thus minimises the use of resources
per unit produced.
Occurs when resources cannot be
reallocated to produce a different
combination of goods that will
increase economic welfare.
Abnormal profits give scope for reinvestment and funding for research,
development and innovation.
Productive
Allocative
Dynamic
2.1
Shortrun
Price
Condition
MC=AC
P(AR)=MC
AR > AC
Long-run
Price
M
C AC
MC
AC
E
P1
D=AR=
MR
Q1
E2
P2
D1=AR1=
MR1
Q2
Output
Output
2.2
Type of Efficiency
Short-run
Productive
X
Long-run
3.1
3.2
3.3
√
Allocative
Dynamic
√
√
X
√
B
C
B
4.1
MC
Price
P1
LOSS
E
Q1
4.2 Average fixed cost
(AFC=TFC/Q)
AC
AVC
D=AR=MR 4.3 You ought to suggest that the
firm continue to operate at Q1, even
at a loss in the short-run. This is
because the firm is currently
Output
covering AVC, and therefore making
a contribution towards their fixed
costs. By www.a-zbusinesstraining.com
shutting down immediately,
the firm would still have to pay