IB Economics HL-Market Power-Introduction-Perfect Competition

In a bustling marketplace, Tangguh and Noah are observing the various stalls. They notice that there are many buyers and sellers, selling fruits and vegetables. They discuss how this scenario reflects the main characteristics of perfect competition. What are the main characteristics?

• The main characteristics of perfect competition include many buyers and sellers, identical products, free market entry and exit, perfect information, and price-taking behavior.

• High barriers to market entry

• Products are differentiated

• Limited number of buyers and sellers

Answer explanation

The correct choice highlights the main characteristics of perfect competition, which include many buyers and sellers, identical products, free market entry and exit, perfect information, and price-taking behavior.

In a local farmers' market, Alisha notices that there are many different stalls selling the same type of fresh vegetables. How many firms are typically found in a perfectly competitive market?

• A few firms

• One firm

• An infinite number of firms

• Many firms

Answer explanation

In a perfectly competitive market, there are many firms competing with each other. This ensures that no single firm can influence the market price, leading to a high level of competition and efficiency.

In a local farmers' market, Snow and Megan are selling identical apples. What role does product homogeneity play in this perfect competition scenario?

• Product homogeneity leads to a monopoly market structure.

• Product homogeneity reduces competition by creating brand loyalty.

• Product homogeneity allows firms to set their own prices independently.

• Product homogeneity ensures that firms are price takers, leading to intense competition based solely on price.

Answer explanation

Product homogeneity means all firms offer identical products, making them price takers. This leads to intense competition where firms compete primarily on price, as consumers will choose the lowest price available.

Alisha and Chloe are running a lemonade stand in their neighborhood. They notice that many other kids are also selling lemonade at the same price. They realize that they cannot charge more than the going rate if they want to sell their lemonade. Explain the concept of price takers in a perfectly competitive market based on their experience.

• Price takers can set their own prices based on demand.

• Price takers are firms that can influence the market price significantly.

• Price takers are firms that only sell unique products in the market.

• Price takers are firms in a perfectly competitive market that accept the market price and cannot influence it.

Answer explanation

In a perfectly competitive market, price takers are firms that accept the prevailing market price and cannot influence it. They sell identical products, making them unable to set their own prices.

In a small town, Taeyun and Snow decide to open their own coffee shops. They notice that there are no barriers to entry, and anyone can start a coffee shop. What is the significance of free entry and exit in perfect competition for their businesses?

• It allows for efficient resource allocation and promotes competition.

• It decreases consumer choice and innovation.

• It restricts market entry to large firms only.

• It leads to monopolistic practices and higher prices.

Answer explanation

Free entry and exit in perfect competition ensures that resources are allocated efficiently, as firms can enter or leave the market freely. This dynamic promotes competition, benefiting consumers through lower prices and better choices.

In a local farmers' market, Anis and Tangguh are trying to sell their fresh produce. The price at which they can sell their tomatoes is determined by the point where the number of tomatoes buyers want to purchase equals the number of tomatoes Anis and Tangguh are willing to sell. How is the equilibrium price determined in this perfectly competitive market?

• The equilibrium price is based on historical prices of similar goods.

• The equilibrium price is determined by the highest bidder.

• The equilibrium price is set by government regulations.

• The equilibrium price is where market demand equals market supply.

Answer explanation

The equilibrium price in a perfectly competitive market is determined at the point where market demand equals market supply, ensuring that the quantity of goods buyers want to purchase matches the quantity sellers want to sell.

What happens to the price in a perfectly competitive market when demand increases, for example, when Noah and Kevin decide to buy more organic apples at the local market?

• The price decreases.

• The price remains the same.

• The price fluctuates randomly.

• The price increases.

Answer explanation

In a perfectly competitive market, an increase in demand leads to higher prices as suppliers respond to the greater willingness to pay. Thus, the correct answer is that the price increases.

Chloe and Harith are studying the long-run adjustments in a perfectly competitive market. They learn that in the long run, firms in this market earn zero economic profits due to free entry and exit. Can you describe this concept further?

• Prices fluctuate wildly in the long run due to market manipulation.

• In the long run, firms in a perfectly competitive market earn zero economic profits due to free entry and exit.

• Firms can earn unlimited economic profits in the long run.

• There is no entry or exit of firms in the long run.

Answer explanation

In a perfectly competitive market, the long-run adjustment leads to zero economic profits for firms due to free entry and exit. This ensures that any short-term profits attract new firms, driving profits down to zero.

In a local farmers' market, Snow and Tristan are selling organic vegetables. In the short run, they can earn supernormal profits due to high demand, but in the long run, as more farmers enter the market, they will only earn normal profits. What is the difference between short-run and long-run equilibrium in perfect competition?

• Short-run equilibrium is only achieved in monopolistic competition.

• Long-run equilibrium can have supernormal profits or losses.

• Short-run equilibrium always leads to zero economic profit.

• Short-run equilibrium can have supernormal profits or losses, while long-run equilibrium results in zero economic profit.

Answer explanation

In perfect competition, short-run equilibrium can yield supernormal profits or losses due to varying costs and demand. However, in the long run, firms enter or exit the market, leading to zero economic profit.

In a local farmers' market, Tangguh and Megan are selling organic vegetables. How do firms like theirs in perfect competition achieve allocative efficiency?

• Firms produce where price equals marginal cost.

• Firms produce at a level where total revenue exceeds total cost.

• Firms engage in price discrimination to increase market share.

• Firms set prices above marginal cost to maximize profits.

Answer explanation

Firms in perfect competition achieve allocative efficiency by producing where price equals marginal cost. This ensures that resources are allocated optimally, as the price consumers are willing to pay matches the cost of producing the last unit.