Economics and Supply Curve Essay

1.(Demand Under Perfect Competition) what type of demand curve does a perfectly competitive firm face? Why?

A horizontal or a perfectly elastic, demand curve. A perfectly competitive firm is called a price taker because that firm must “take,” or accept, the market price- as in “take it or leave it.”

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2.Explain the different options a firm has to minimize losses in the short run.

A firm in perfect competition has no control over the market place. Sometimes that price may be so low that a firm loses money no matter how much it produces.

Such a firm can either continue to produce at a loss or temporarily shut down.

3.(The Short-Run Firm Supply Curve) Each of the following situations could exist for a firm in the short run. In each case, indicate whether the firm should produce in the short run or shut down in the short run, or whether additional information is needed to determine what it should do in the short run

a.Total cost exceeds total revenue at all output levels.
Shut down in the shirt run.
b.Total variable cost exceeds total revenue at all output levels. Produce in the short run.

4.(The Long-Run Industry Supply Curve) A normal good is being produced in a constant-cost, perfectly competitive industry. Initially, each firm is in long-run equilibrium. Briefly explain the short-run adjustments for the market and the firm to a decrease in consumer incomes. What happens to output levels, prices, profits, and the number of firms?

There are various variables, among them what kind of business are we talking about; what is the size of the company, what business is it in; what products or services does it provides, what much revenue and personnel does it have all these factor are a calculus to the issue. The point being that all these factors have to be analyzed to determine how the short-run will be affected. There is an economy of scales. As the company stays in business longer and longer it learns how to better produce goods in an ever decreasing price reduction. When this occurs there is an increase in revenue and this translates into profits. This is very competitive to other firms in the industry.

5.(Long-Run Industry Supply) Why does the long-run industry supply curve for an increasing-cost industry slope upward? What causes the increasing costs in an increasing-cost industry?

Having a supply curve that slopes upward means the higher the price, the more suppliers are willing to supply the market. In the long run as price increases, more and more firms are willing to produce more product as Price is greater than Marginal cost. So the supply curve is upward sloping.

6.The National Council of Economic Education’s EconEdLink has an interesting module on the economics of Internet access at Please review the materials provided. Is provision of Internet access a competitive industry? Briefly discuss.

Anything which has price is competitive. Firms attempt to take away business from competitors by reducing prices and/or providing better service so as to gain their business. In the internet business it is no different. If the internet service provider charge per minute, by the hour, by the week or month than there will invariably be a decrease in usage as the prices go up. However, when there is a flat rate across the board regardless of usage more and more people will simply use the services.

7.Commodities like gold often trade in markets that are examples of perfect competition. Think of a commodity that you believe trades in a perfectly competitive market, and describe why you believe this is so.

Oil is a commodity which trades in a perfectly competitive market. The reason is that oil companies are an oligarchy, a few in the market. They are almost a monopoly. They set the price across the board. No one company can dominates the market each simply follows the establish price. There are no barriers into entry other than having the capital to get in. Also, they do not collude to establish any uniform price levels they simply set the price in what they individually believe the price should be.

8.(The Short-Run Firm Supply Curve) An individual competitive firm’s short-run supply curve is the portion of its marginal cost curve that equals or rises above the average variable cost. Explain why.

A perfectly competitive firm’s supply curve is that portion of its marginal cost curve that lies above the minimum of the average variable cost curve. A perfectly competitive firm maximizes profit by producing the quantity of output that equates price and marginal cost. As such, the firm moves along its positively-sloped marginal cost curve in response to changing prices.

9. What are the major characteristics of perfectly competitive market?

A perfectly competitive market is characterized by (1) many buyers and sellers, so many that each buys or sells only a tiny fraction of the total amount in the market; (2) firms sell a commodity, which is a standardized product, such as a bushel of wheat, an ounce of gold, or a share of Google stock. (3) buyers and sellers are fully informed about the price and availability of all resources and products. (4) firms and resources are freely mobile.

10.(Perfect Competition and Efficiency) Define productive efficiency and allocative  efficiency. What conditions must be met to achieve them?

Productive efficiency is the condition that exists when production uses the least-cost combination of inputs; minimum average cost in the long run. The entry and exit of firms and any adjustment in the scale of each firm ensure that each firm produces at the minimum of its long-run average cost curve.

Allocative efficiency is the condition that exists when firms produce the output most preferred by consumers; marginal benefit equals marginal cost. Having equal marginal cost, meaning there will be no excess production and cost, will achieve allocative efficiency.

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