Photo AI
The diagram below represents the long run equilibrium of a firm in Perfect Competition - Leaving Cert Economics - Question 1 - 2007
Question 1
The diagram below represents the long run equilibrium of a firm in Perfect Competition. (a) (i) Copy the diagram into your answer book. Clearly label each of the li... show full transcript
Worked Solution & Example Answer:The diagram below represents the long run equilibrium of a firm in Perfect Competition - Leaving Cert Economics - Question 1 - 2007
Step 1
(i) Copy the diagram into your answer book. Clearly label each of the lines numbered 1 to 4.
Answer
To label the diagram:
- Label the Y-axis as Price / Cost.
- Label the X-axis as Quantity.
- Label the point of intersection for the Average Cost curve as Average Cost (AC).
- Label the demand curve at point E as Marginal Revenue / Average Revenue / Demand (D-AR-MR).
This visual representation demonstrates the firm's equilibrium.
Step 2
(ii) Equilibrium occurs at point E on the diagram.
Answer
On the diagram:
- The output the firm will produce in equilibrium: Q1.
- The price charged for this output: P1.
- The average cost of producing this output: C1.
These labels indicate the firm’s optimal output level, corresponding price, and production cost.
Step 3
(iii) 'Perfect Competition is described as being efficient'.
Answer
Explanation of Efficiency in Perfect Competition:
- In perfect competition, firms achieve efficiency by producing at the lowest point of the average cost curve, represented at point E on the diagram. This means that the firm can supply goods at minimal cost, ensuring that consumers pay lower prices.
- Additionally, perfect competition ensures resource allocation is optimal since firms cannot influence prices and must produce where marginal cost equals marginal revenue. This avoids wastage of resources.
Step 4
(b) (i) State THREE characteristics/assumptions of Perfect Competition.
Answer
Three Characteristics of Perfect Competition:
- Many Buyers and Sellers: No individual buyer or seller can influence market prices.
- Homogeneous Products: All firms produce identical products, leading consumers to make choices based on price alone.
- Free Entry and Exit: Firms can enter or leave the market freely without restrictions, promoting competition.
Step 5
(b) (ii) Write brief notes on each of these.
Answer
Brief Notes on Each Characteristic:
- Many Buyers and Sellers: This creates a balance in the market where prices are determined through supply and demand.
- Homogeneous Products: Standardization ensures that consumers do not favor one seller over another based on product differences, allowing price competition to prevail.
- Free Entry and Exit: This encourages innovation and efficiency as firms must remain competitive or risk losing market share.
Step 6
Step 7
Step 8
(c) (iii) State and explain ONE way each of the following may be affected by privatisation:
Answer
Effects of Privatisation:
-
On Consumers:
- Impact: Potential improvements in service quality and competition.
- Explanation: The privatised company may strive to enhance service delivery to retain customers and increase market share.
-
On Employees:
- Impact: Changes in job security and conditions.
- Explanation: Employees may face job cuts as the new management seeks to optimize operations, resulting in a more profit-oriented workforce.