18 Questions
What is the relationship between the price and quantity demanded under perfect competition, and what does this imply for the demand curve?
The quantity demanded reduces as the price increases. This implies that the demand curve (DD’) slopes downward.
How does the supply of a product change in response to a price change, and what is the shape of the supply curve under perfect competition?
The supply of a product increases at high price and decreases at low price. Therefore, the supply curve (SS’) slopes upward.
What happens when the price is above the equilibrium price, and how does the market adjust to reach equilibrium?
When the price is above the equilibrium price, supply is more than demand, and prices will fall to reach equilibrium.
What is the condition for a firm to be in equilibrium under perfect competition, and what does this imply for the firm's pricing power?
A firm is in equilibrium when it is earning maximum profit, and it has to accept the price determined by the industry. The firm is a price taker, not a price maker.
What is the meaning of equilibrium in the context of perfect competition, and how is it identified in a graph?
Equilibrium is the point at which the quantity demanded equals the quantity supplied. It is identified in a graph where the demand curve intersects the supply curve.
What is the difference between the demand curve and the supply curve under perfect competition, and how do they interact to determine the market price?
The demand curve slopes downward, while the supply curve slopes upward. The interaction between the two curves determines the market price and quantity.
In a perfectly competitive market, how does the presence of perfect knowledge among buyers and sellers affect the firm's decision to advertise or promote their products?
The firm does not need to invest in advertising or sales promotion because buyers are already informed about the product, keeping the price of their products low.
What would happen to a seller who tries to charge a higher price for a similar product in a perfectly competitive market?
The seller would lose their customers immediately.
How does the mobility of factors of production contribute to the functioning of a perfectly competitive market?
It allows factors like labor, raw materials, and capital to move freely, enabling firms to respond to changes in market demand and supply.
What is the primary factor that determines a firm's decision to enter, stay, or leave a perfectly competitive market?
Economic factors.
How does the presence of free entry and exit in a perfectly competitive market affect the industry's equilibrium?
It allows firms to enter or exit the market in response to changes in market demand and supply, maintaining equilibrium.
What is the role of perfect knowledge in determining the price of a product in a perfectly competitive market?
Perfect knowledge among buyers and sellers enables them to make informed decisions, leading to a price that reflects the true market value of the product.
What is the characteristic of the demand curve or average revenue curve of a firm in a perfectly competitive market?
A horizontal straight line, parallel to the X-axis.
What is the significance of the point of intersection of the market demand and supply curves?
It represents the equilibrium point, where the equilibrium price and equilibrium quantity are determined.
What is the condition for a firm to be in equilibrium in a perfectly competitive market?
When marginal cost (MC) is equal to marginal revenue (MR), and the MC curve cuts the MR curve from below.
Why does a firm continue to add to its output as long as marginal revenue (MR) is greater than marginal cost (MC)?
Because additional output adds more revenue than costs and increases its profits.
What is the relationship between the marginal revenue curve and the average revenue curve for a perfectly competitive firm?
The marginal revenue curve coincides with the average revenue curve.
What is the role of the price mechanism in a perfectly competitive market?
It determines the equilibrium price and quantity, and acts as a signal for firms to adjust their output to maximize profits.
Learn about the concept of perfect competition in economics, understanding how demand and supply curves are affected by price changes. Analyze the behavior of demand and supply curves under perfect competition.
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