Imperfect Competition

Question 1

conditions for imperfect competition

Answer 1

1. many firms, goods are not homogenous, they are unique but also substitutes for one another
2. large number of relatively small consumers
3. product differentiation occurs, competitive advertising and branding to convince consumers one product is better
4. firms aim to make max. profit
5. there is full knowledge of profits being earned in the industry
6. freedom of entry to/from industry
7. do not have a perfectly elastic supply of F.O.P, ie they may have to compete for them

Question 2

why is AC not at its lowest point

Answer 2

1. there is the extra ‘non-production’ cost of
   competitive advertising
2. excess capacity, therefore firms are not producing enough to benefit from economies of scale
3. AR is a tangent to AC at equilibrium

Question 3

advantages of imperfect competition

Answer 3

1. offers consumers a choice
2. the competitive advertising creates:
   - employment in advertising industry
   - consumers more informed for better choice
3. firms are dynamically efficient, they are innovative and creative, striving to be better than competitors

Question 4

summary of diagram

Answer 4

AR=AC as normal profits are earned
MR=MC as firm is earning max. profit
AR and AC > MR and MC
AC is not at lowest point

Question 5

disadvantages of imperfect competition

Answer 5

1. production is not at min. point of AC
2. excess capacity, wasteful of resources
3. advertising costs as passed on to consumers, wasting consumers resources (money)

Question 6

imperfect competition vs perfect competition

Answer 6

• in LR both earn NP
  -PC produces at lowest point of AC not in IPC
  -PC face horizontal demand curve
  IPC face downward sloping demand curve