Page 164 - DECO405_MANAGERIAL_ECONOMICS

Unit 9: Market Structure – Perfect Competition

5. What will happen to the demand curve of a perfectly competitive firm if: Notes
(a) new sellers are attracted to the industry by the existence of supernormal profits?
(b) there is an increase in market demand for the firm's output?
6. Why is it inappropriate to refer to a perfectly competitive firm as 'earning supernormal
profit in the long-run'?
7. Under what conditions will a firm operating in a perfectly competitive industry choose to
leave the industry?

8. For a perfectly competitive firm, why is it insufficient to say that profit maximisation
takes place at the output where marginal cost equals marginal revenue?
9. In the perfect market, if individuals are enjoying consumers' surplus, does it mean that, as
a consequence, producers are not receiving producers' surplus?
10. The case of perfect competition is sometimes referred to as a 'benchmark' industrial
structure. In this context, what do you think commentators mean by the term 'benchmark'?

11. Taking a real life example, discuss the features of the perfect competition.
12. Why is a firm under perfect competition described as a price-maker? Deduce its equilibrium
conditions in the short run.
13. Assume that firms in the short run are earning above normal profits. Explain what will
happen to these profits in the long run for a market having perfect competition.
14. How and when will you determine the closing down point in the short run?
15. Explain LMC= LAC= P. Comment.

16. Examine the shut down decision in the long run.

Answers: Self Assessment

1. (a) True (b) False (c) False
(d) False (e) True (f) True
(g) False (h) False (i) True
2. (a) Infinitely (b) variable (c) variable

(d) LMC (e) minimum (f) rising
(g) expansion (h) free

9.8 Further Readings

Books Bibek Debroy, Managerial Economics, Global Business Press, Delhi.

Dr. Atmanand, Managerial Economics, Excel Books, Delhi.
Shapiro, Bensen, The Psychology of Pricing, Harvard Business Review.

LOVELY PROFESSIONAL UNIVERSITY 159