Economics paper 1 markets and markets
failure
Disadvantages of perfect competition in long-run - correct answer-Lack of DE as they make
only normal profits no reward for taking risk to re-invest. No progress over time with
technology, innovation, and capital development consumers and producers may lose those
benefits
Lack of economies of scales there are various firms trading similar types of products. So,
business firms cannot enjoy the benefit of economies of large scale.
Limited Choice
This market deals with identical or homogeneous products and services. Therefore there is a
limited choice for customers. Because of the lack of variety
Cost cutting in dangerous areas such as health and safety, environmental standards wages
cuts- against society interest to be x- efficient
Explain the growth objective - correct answer-Some firms might aim to increase the size of
their firm. This could be to take advantage of economies of scale, such as risk-bearing or
technological. This would lower their average costs in the long run, and make them more
profitable. Firms might grow by expanding their product range or by merging or taking over
existing firms. Large firms are also more able to participate in research and development,
which might make them more competitive and efficient in the long run.
Explain the objective of improving quality - correct answer-Firms might aim to increase their
competitiveness by improving their quality. Firms might consider improving their customer
service or the quality of the good they produce. This could be achieved through innovation. If
firms can gain a reputation for high quality goods, they could potentially charge higher
prices, since consumers might be willing to pay more for them.
Explain the objective of survival - correct answer-particularly new firms entering competitive
markets, might aim to simply survive in the market. This is a short term view. During periods
of economic decline such as the 2008 financial crisis, when consumer spending plummets,
firms might have survival as their objective, until there is economic growth again. Firms
might aim to sell as much as possible to keep their market position, even if it is at a loss in
the short run.
Features of Perfect Competition - correct answer-many buyers and small sellers,
similar/homogeneous products, no barriers to entry or exit, firms are price takers, perfect
knowledge, prof max assumed to be objective, all have access to factors of production,
perfectly elastic demand
How efficient are firms in perfect competition in the long and short run - correct answer-Short
run yes: xe, ae, de no: pe Long run yes: pe,ae,xe no: de
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