Perfect Markets
1.1
Multiple Choice questions
1.1.1 The interest that an entrepreneur forfeits on his/her own capital that
he/she is using in the business is regarded as … costs.
A
explicit
B
indirect
C
implicit
1.1.2
A
B
C
As a rule, the firm should shut down its business at the point where its …
MR = AVC.
MR = ATC.
MC = MR.
1.1.3 The … tries to give all South Africans equal opportunities to participate fairly in
economic activities.
A
Competition Commission
B
South African Reserve Bank
C
Prosecution Commission
1.1.4
A
B
C
Because of its lack in market power, the perfectly competitive business is a …
price maker.
price taker.
price competitor.
1.1.5 The concept that describes a state in which all opposing market
forces are balanced, is known as …
A
collusion.
B
equilibrium.
C
competition.
1.1.6 The assumption used by economists to describe a state where all
other factors remain unchanged, is known as the … rule.
A
ceteris paribus
B
free-rider
C
constant
1.1.7 To reduce cost without producing fewer goods, refers to …
A
productive inefficiency.
B
productive efficiency.
C
opportunity cost.
1
1.1.8 A firm will increase production when …
A
MC = MR.
B
MR > MC.
C
P = MC.
1.1.9
A
B
C
The revenue derived from the sale of an additional unit is … revenue.
marginal
additional
average
1.1.10 A market where the government does not interfere is regarded as a(n) …
market.
A
regulated
B
unregulated
C
labour
1.1.11 In a perfect market the individual firm is a price …
A
leader.
B
maker.
C
taker.
1.1.12 Internal costs are known as … costs.
A
private
B
social
C
public
1.1.13 An example of perfect competition is the …
A
crude-oil market.
B
JSE Securities Exchange.
C
International Diamond Exchange.
1.1.14 Maximum profit is earned at the point where marginal revenue is equal to …
A
average cost.
B
total cost.
C
marginal cost.
1.1.15 Products of a perfect competitor are …
A
unique.
B
differentiated.
C
homogenous.
2
1.1.16 A situation where identical products are sold at different prices to different
consumers is referred to as price …
A
differentiation.
B
stability.
C
discrimination.
1.1.17 When the market price is less than marginal cost the producer will ... production
in order to maximise profits.
A
decrease
B
increase
C
stop
1.1.18 When the product mix does not reflect the consumers' taste it is known as …
inefficiency.
A
productive
B
allocative
C
technical
1.2
Give the economic term/concept for each of the following descriptions
1.2.3 A mechanism that brings together buyers and sellers of a good or service
1.2.2 The additional cost incurred when production increases by one more unit
1.2.2 The mechanism that brings together buyers and sellers of goods and services
1.3
Choose the word between brackets
1.3.1 The shutdown point in a perfect market is where price is equal to
(average/average variable) cost.
1.3.2 The main objective of the Competition (Commission/Tribunal) of
South Africa is to investigate and evaluate restrictive business
practices.
1.2.3 Products sold on the perfect markets are (homogenous/ heterogeneous) in
nature.
1.2.4 The demand curve of a perfect competitor is the same as his marginal
(revenue/cost) curve.
1.2.5 When the product mix does not reflect the consumer's taste, it indicates a/an
(productive/allocative) inefficiency.
(4 x 2)
1.2.6 All products sold in the perfect market, are (homogeneous / heterogeneous).
1.2.7 A mechanism that brings buyers and sellers together is known as a
(tribunal/market).
1.2.8 The value of inputs that are owned by the entrepreneur and being used in the
production process is known as (implicit / explicit) cost.
1.2.9 Fixed costs are also known as (direct/indirect) costs.
3
1.2.10 Profit is maximised when marginal revenue equals (marginal/ average) cost.
1.2.11 The marginal (cost/revenue) curve will always intersect the average cost curve
at its minimum point.
1.2.12 When income equals total cost in perfect market conditions, it is called
(normal/economic) profit.
1.2.13 The cost of inputs that are owned by the entrepreneur and used in the
production process is known as (explicit/implicit) costs.
1.2.14 Under perfect market conditions the price is determined by the
(market/individual) supply and demand curves.
1.2.15 Costs which remain the same regardless of the level of production
are called (fixed/variable) costs.
1.2.16 Price discrimination occurs when (identical/different) goods are
sold at different prices.
1.2.17 The rent that an entrepreneur pays is regarded as an (explicit/implicit) cost.
2.
Data Response
2.1
Study the graph below and answer the questions that follow.
2.1.1 What quantity of goods will be produced by the individual firm? Give a reason
for your answer.
(4)
2.1.2 Identify the profit depicted by point A.
(2)
2.1.3 Explain the importance of point B in relation to production and costs.
(4)
4
2.2
Study the extract below and answer the questions that follow.
2.2.1 What is the main reason for the workers' opposition to the deal between the two
companies?
(2)
2.2.2 Why is the Competition Commission concerned about the take-over of this
South African company?
(2 x 2) (4)
2.2.3 Besides the Competition Commission and Competition Tribunal, which other
institution plays a role in regulating competition in South Africa?
(2)
2.2.4 How will the consumer benefit from competition?
(2)
2.3
Study the following graphs and answer the questions that follow.
5
2.3.1
2.3.5
Which of the above graphs are associated with (i) loss (ii) normal profit
(iii) economic profit?
Define normal profit.
Identify the profit maximisation point in Graph B.
Calculate the total economic loss as reflected in Graph C. Show ALL
calculations.
Calculate total revenue as indicated in Graph A.
2.4
Study the graph below and answer the questions that follow.
2.3.2
2.3.3
2.3.4
2.4.1 Define the concept market.
2.4.2 Under which market conditions will the above market situation prevail?
Motivate your answer.
2.4.3 Identify the market price from the graph.
2.4.4 Determine the profit maximisation point on the graph.
2.4.5 Distinguish between short-term and long-term equilibrium.
2.4.6 What does the shaded area represent in the above graph?
(6)
(2)
(2)
(6)
(2)
(2)
(5)
(2)
(2)
(4)
(4)
6
2.5
Study the graph below and answer the questions that follow.
2.5.1 Which type of market does the graph represent?
2.5.2 Explain how price is determined in the above market.
2.5.3 Copy the above graph to the ANSWER BOOK and show what would
happen if new firms enter at this market.
2.6
(2)
(4)
(4)
Study the graphs below and answer the questions that follow.
2.6.1 Which ONE of the above graphs is associated with an economic loss?
2.6.2 Define normal profit.
2.6.3 Identify the profit maximisation point in Graph B.
2.6.4 Calculate the total economic loss. Show ALL calculations.
(2)
(2)
(2)
(3)
7
2.7
Study the graphs below and answer the questions that follow.
2.7.1 Which type of market structure is represented by the graphs?
2.7.2 How is the price for an individual business determined?
2.7.3 Copy the graph of the industry into your ANSWER BOOK and
show what would happen to the price if most of the firms decide to
leave this market.
(2)
(2)
(6)
3
Answer the following questions
3.1
List any THREE aims of a competition policy.
3.2
Use the graph below to explain short-term economic profit for the perfectly
competitive business.
(8)
(3 x 2)
(6)
8
3.3
List the THREE institutions that control anti-competitive behaviour in South
Africa.
(3 x 2) (6)
3.4
Draw a fully labelled graph to illustrate the shut-down point in a perfect
market.
(8)
3.5 List any THREE aims of a competition policy.
(3 x 2) (6)
3.6
List any THREE conditions/characteristics of a perfect market. (3 x 2) (6)
3.7
Discuss TWO aims of South Africa's competition policy.
3.8
Discuss the role of the key institutions that regulate competition in South Africa.
(2 x 4)(8)
Make a comparison between a perfect market and a monopoly with regard to
prices, profit, quantities and cost.
(8)
3.9
(2 x 4) (8)
Essay that were previously asked in examinations
NLAS 2008
Tabulate the different market structures in detail. Use the following criteria to explain
the differences: number of businesses, nature of product, market information,
collusion, entry to market, control over market price, demand curve and long term
economic profit. Use applicable South African examples.
9
NOVEMBER 2008
'Markets are at the centre of economic activities and provide the dynamics for the
performance of economies.'
Discuss perfect competition as a market structure with special reference to the
definition and characteristics.
Conclude your discussion with reasons why you would not participate in the
market under conditions of monopolistic competition.
MARCH 2009
Explain with the aid of graphs how short- and long-term equilibrium for the individual
producer is achieved under conditions of perfect competition. Use the following
headings in your explanation: market supply and demand, normal profit, and economic
profit and loss.
MARCH 2010
With the aid of the graphs below, examine the dynamics of long-term
equilibrium in the individual firm and industry under conditions of perfect
competition.
10
NOVEMBER 2011
Use graphs to analyse the various short-run equilibrium positions for an individual
business in the perfect market.
11
Essay that were previously asked in examinations
NLAS 2008
Tabulate the different market structures in detail. Use the following criteria to explain
the differences: number of businesses, nature of product, market information,
collusion, entry to market, control over market price, demand curve and long term
economic profit. Use applicable South African examples.
NOVEMBER 2008
'Markets are at the centre of economic activities and provide the dynamics for the
performance of economies.'
Discuss perfect competition as a market structure with special reference to the
definition and characteristics.
Conclude your discussion with reasons why you would not participate in the
market under conditions of monopolistic competition.
MARCH 2009
Explain with the aid of graphs how short- and long-term equilibrium for the individual
producer is achieved under conditions of perfect competition. Use the following
headings in your explanation: market supply and demand, normal profit, and economic
profit and loss.
MARCH 2010
With the aid of the graphs below, examine the dynamics of long-term
equilibrium in the individual firm and industry under conditions of perfect
competition.
12
NOVEMBER 2011
Use graphs to analyse the various short-run equilibrium positions for an individual
business in the perfect market.
13