2. Examination of the dynamics of perfect markets with the aid of cost and revenue curves. Perfect competition Individual business and industry Market structure Output Profits Losses and supply Competition policies

4. Producer’s behaviour dependant on market structure. Markets can be described as: Perfect competition Monopolistic competition Monopoly Oligopoly

5. Perfect competition: occurs when none of the individual market participants are able to influence the market price of a product.

6. a)Many buyers and sellers  Neither have market power  Both are tiny parts of the overall market  Sellers are price takers  Perfectly elastic demand  Excess supply/demand cleared by price mechanism.

7. b) Complete freedom of entry and exit  Freedom to enter into and exit from market  No legal, financial or technological barriers  New firms enter when profits are high  Ensures efficient use of resources  No sunk costs a cost of production that the firm cannot recover should they leave the industry. E.g. advertising, product research, speciality equipment etc. Sunk costs: a cost of production that the firm cannot recover should they leave the industry. E.g. advertising, product research, speciality equipment etc.

8. g) Products are homogeneous a similar or identical product. Homogeneous product: a similar or identical product.  Buyers cannot distinguish between the products  Makes no difference where buyers buy from  At higher prices, buyers will go elsewhere  Lower prices – not maximising profits

9. g) Perfect information  Buyers/sellers have full knowledge of current market conditions & can buy from anywhere without incurring additional transport costs.

10. g) No government intervention  Markets are unregulated h) No collusion between sellers  Each seller acts independently

12. Indicate whether the following statements are true or false: a)For perfect competition to exist there must be many sellers and a few large buyers. (1) b)Being a price-taker implies that a producer has no market power over the market price of the product. (1) c)Under perfect competition, it is possible for the individual producer to decide what the price of a product must be. (1) d)Under perfect competition, producers collude with one another to influence the market price. (1) e)It is easy for new firms to enter a perfectly competitive market. (1)

15. Individual firm is a price taker

18. Each unit of output sold at same price. Demand curve also = to average revenue (AR) and marginal revenue (MR) curves.

21. Quantity of fixed factors (eg capital) does not change as output change, therefore, fixed costs do not change as output changes. No fixed costs in long run, as all the factors of production are variable. Quantity of the variable factors (labour) does change as output changes, therefore, variable costs changes as output changes. Did you remember…

22. time period for which quantity of at least one FOP is fixed Short run: time period for which quantity of at least one FOP is fixed time period when no quantities FOP is fixed Long run: time period when no quantities FOP is fixed Variable costs (VC) + Fixed costs (FC) Total costs (TC) = Variable costs (VC) + Fixed costs (FC) do not change as output changes Fixed costs: do not change as output changes Variable costs: change as output changes Variable costs: change as output changes

23. ATC = TC Q AFC = FC Q AVC = VC Q MC = ∆TC ∆Q ATC = TC Q

24. TR = P X Q AR = TR Q MR = ∆TC ∆Q

35. TC > TR except at 0-2 units. 2 units : TC = TR = R20. Breaks even & make normal profit. 2 units : TC = TR = R20. Breaks even & make normal profit.

36. Because individual firms too small to influence price – based on market price taken, they must decide… should they continue production? how much should they produce to maximise its profits?

37. Firms maximise profits when MR = MC When MR > MC → profits increase When MR < MC → profits decline

38. At 2 units, MC = MR = AR =AC Profit-maximising output, P = R10. TR = 2 units × R10 = R20. Average cost of 2 units = R10. TC = 2 units × R10 = R20. Therefore at 2 units: TR = TC Breakeven & normal profits made.

41. Normal profits: occur when total costs = total revenue. Minimum earnings required to prevent entrepreneur leaving and applying factors of production elsewhere.

42. Profit is maximised where MR = MC = P 2 This occurs at Q 2 At Q 2, AR = P 2 = AC (C 2 ) Since As AR = AC, the firm does not earn an economic profit. Normal profit earned, since all its costs, including self-employed resources, are fully covered. E 2 aka break even point

43. Can also be found by TR - TC TR = P 2 X Q 2 = 0P 2 E 2 Q 2 TC = C 2 X Q 2 = 0C 2 E 2 Q 2 0C 2 E 2 Q 2 (TC) = 0P 2 E 2 Q 2 (TR)

44. Economic profits: profit that a business makes that is more than the normal profit. Economic profit occurs when total revenue > total costs. AKA excess profit, abnormal profit, supernormal profit or pure profit.

45. Profit is maximised where MR = MC = P 3 This occurs at Q 3 At Q 3, AR = P 3 and AC = C 1 At Q 3, AR (P 3 ) > AC (C 1 ) Economic profit earned – above breakeven point.

46. Can also be found by TR - TC TR = P 3 X Q 3 = 0P 3 E 3 Q 3 TC = C 1 X Q 3 = 0C 1 MQ 3 0P 3 E 3 Q 3 (TR) > 0C 1 MQ 3 (TC) Difference = Economic Profit = C 1 P 1 E 3 M

48. Economic loss: occurs when a firm makes less than normal profit. I.e. price (AR) < AC

49. Profit is maximised where MR = MC = P 3 This occurs at Q 3 At Q 3, AR = P 3 and AC = C 3 At Q 3, AR (P 3 ) < AC (C 3 ) Economic loss = C 3 – P 3

50. Can also be found by TR - TC TR = P 3 X Q 3 = 0P 3 E 3 Q 3 TC = C 3 X Q 3 = 0C 3 MQ 3 0P 3 E 3 Q 3 (TR) < 0C 1 MQ 3 (TC) Difference = Economic Loss = P 3 C 3 ME 3

51. If a firm is making an economic loss, should they leave the market? Depends on average revenue (P) relative to average VARIABLE costs. If P < AVC, best to leave the industry. Shut-down point: the point at which P = AVC.

52. Under perfect competition, there is freedom of entry and exit. When firms make economic profit, more producers enter market. Economic profits decrease until they become normal profits. Now there’s no incentive to either enter/exit the market.