2016 – Prashan Karunaratne, Macquarie University MICROECONOMIC PRINCIPLES Questions on… Topic: Perfect Competition The Economics Threshold Concepts engaged in this topic: Marginal Analysis Opportunity Cost Markets – Structures & Interactions RE-CAP & REMIND PURPOSE OF THE QUESTION – For this question, prepare some pointers in your homework solutions, and be ready to discuss in small groups during your tutorial. This question is simply a discussion question for you to think about and actively engage in the model’s assumptions. We discussed that firms (sellers) in a perfectly competitive market are price takers. We also discussed that the market determines the price. What do you think being a ‘price taker’ means in the markets listed below? To what extent are sellers actually price takers in each of these markets? For each of these markets, are the sellers closer to being a price taker, or closer to being a price maker? – Food outlets in the Macquarie Centre food court. – Car dealerships on Church Street in Parramatta. – Individuals wanting to sell (or buy) shares in Telstra. – Rice farmers in The Philippines wanting to sell their rice on the national and world market. – Individuals wanting to sell their AUD in exchange for USD. Extension task – go through the hashtag #mqperfectcomp on social media, and see if you agree with the examples posted by your peers. 2016 – Prashan Karunaratne, Macquarie University ECONOMICS EVERYDAY PURPOSE OF THE QUESTION – This question is designed to make you engage with and understand the decision-making by firms, and the role of the market. Suppose that you are a rice farmer who owns a small rice farm (firm) in The Philippines. Assume that the national and world rice market is perfectly competitive for the purposes of this question. Who decides the price in this market and why? What can you as a farmer (firm) decide? What rule will you utilize to make the decision above? Use the threshold concept of marginal analysis to explain the rule above. How do you calculate your farm’s (firm’s) economic profit in terms of TR and TC? How do you calculate your farm’s (firm’s) economic profit in terms of P and ATC? Draw a graph of your farm (firm) making economic profit. What is economic profit also known as and why? APPLICATION & AWARENESS PURPOSE OF THE QUESTION – This question is designed to help you engage with and understand how profits and losses of firms are calculated. The question is also designed to help you engage with and understand what options are available for a firm that is making short run losses. You need to learn about the conditions for a firm shutting down and how this is different from exiting a market. Figure 14.5 on the next page shows the costs of a firm, Papo, selling blank pieces of white paper, one of 7,000 such firms in Hong Kong’s CBD. Assume this market is perfectly competitive for the purposes of this question. 2016 – Prashan Karunaratne, Macquarie University Why would this market be close to a perfectly competitive market (perfect competition)? Assume that the market price of these papers is 10 cents a page. Calculate Papo’s profit-maximizing output and economic profit. What would happen in the long run and why? Explain what the firm should do if the market price were to fall to 4 cents a page. What would happen in the long run and why? What could firms that are making short run losses do and why? LEARNING LIFE LESSONS PURPOSE OF THE QUESTION – This question is to help you engage with and understand the transition from the short run to the long run. The question is also designed to help you engage with and understand the economic detail involved in this process. This topic engages the economics threshold concept of opportunity cost. What is the opportunity cost of entrepreneurship? Utilise the economics threshold concept of opportunity cost to explain why new firms enter a perfectly competitive industry that is making economic profit. What happens to the market price as new firms join? Draw a graph of a perfectly competitive firm in the long run. For a firm in perfect competition, how much is economic profit in the long run? What variables are equal in the long run? Explain why this still means that firms are making some profit – normal profit. Comment on the allocative efficiency and the productive efficiency of perfect competition.
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