Perfect competition

Figure 3 shows the marginal cost (MC) and average total cost (ATC) curves for a firm in the short run in a perfectly competitive market.

It also shows the firm’s marginal revenue (MR) and average revenue (AR) curves.

What changes can be expected as the market moves into the long run?

There is a reduction in the market demand for the product supplied by firms operating in a perfectly competitive industry.

All other things being equal, which one of the following will happen to firms’ average and marginal revenue as a result of this change?

Explain how perfect competition should lead to outcomes which are both productively and allocatively efficient.

Evaluate the view that technological change tends to bring industries closer to the market structure of perfect competition.

Figure 5 shows the demand (D) curve and the average and marginal cost (AC and MC) curves for a firm operating in a perfectly competitive market for eggs.

The firm is in equilibrium at the initial market price of £1.25 for a box of 6 eggs. If the market price increases to £1.50 for a box of eggs the firm will

Extract C (lines 10–11) states that ‘There is ample opportunity for new players to enter the sector.’

With the help of a diagram, explain how the lowering of barriers to entry in the banking market might lead to lower prices and a situation in which banks make normal profit.