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Tutorial 6 Perfectly Competitive Supply

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nadiyah syafitri
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19 views

Tutorial 6 Perfectly Competitive Supply

Uploaded by

nadiyah syafitri
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOC, PDF, TXT or read online on Scribd
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Tutorial: Perfectly Competitive Supply

1) Reviewing the Basics

The individual supplier has: Total Fixed Costs (TFC), Total Variable Costs (TVC), Total Costs (TC),
Average Total Costs (ATC), Average Fixed Costs (AFC), Average Variable Costs (AVC), Marginal
Cost (MC).

a) In your own words, what do you think is:

i) An essential feature of a Perfectly Competitive Market?


ii) The most important cost to consider?
iii) Loss minimising?
iv) The shutdown point?
v) The difference between the short and long run?

b) On a graph, draw the demand curve an individual firm faces when supplying a market under
perfect competition.

c) Complete the following cost table.

[Hint: begin by listing each formula you need to calculate each cost.]

Quantity ATC AVC AFC MC


TC ($) FC ($) VC ($)
(units) ($/unit) ($/unit) ($/unit) ($/unit)
0 24
1 16
2 50
3 108
4 52
5 39.2
6 47

2) The Application
a) You did really well in your ECON1010 final exam and decide to offer private online
microeconomics tutoring. You recognise you will need to consider the following costs:
1. Fixed costs: laptop and software.
2. Variable costs: tutoring online platform (pay per minute) and internet usage.
3. Opportunity cost: your current job.

What assumptions are necessary to make this a perfectly competitive market?


Now consider online microeconomics tutoring is a perfectly competitive market. When would
an economist advise you to:

i) Shut down your online tutoring operation.


ii) Change your tutoring price.
iii) Reduce hours of tutoring to earn greater profits or smaller losses.
iv) Increase hours of tutoring to earn greater profits or smaller losses.
v) Leave your hours of tutoring decision unchanged.

b) The diagram below represents your online tutoring costs per week in the short run.

As you calculate the answers for the questions below, clearly mark them on the diagram:

i) What is your profit-maximising output (number of hours per week)?

ii) At the profit maximising output, what is your total revenue per week?

iii) At the profit maximising output, what are your total costs?

iv) At the profit maximising output, what is your profit (or loss)?

v) At what price should you stop tutoring (shut down)?

vi) If the microeconomics online tutoring market price decreases from $40/hour to
$20/hour, how many hours/week should you tutor to maximise profit or minimise
losses?

vii) At this new output level (price = $20/hour) do you earn more or less profit than in part
iv)?
c) A perfectly competitive firm is producing at the profit-maximising output level and finds it
average variable cost (AVC) is $6.50/unit, its average total cost (ATC) is $6.70/unit, and it
faces a market price (P) of $6.60/unit. For each of the following statements, state whether
the statement is true or false and explain why. Use the diagram below to justify your answer.

(i) The firm is earning an economic profit of 10 cents per unit.

(ii) The firm should absorb the 10 cent loss per unit and continue operating where price
equals marginal cost.

(iii) The firm should shut down because it will lose less than if it continues to operate.

(iv) The firm should increase production to decrease the total cost per unit.

3) The Creative
DURING or AFTER the tutorial, work through the following to develop your understanding of
how perfectly competitive markets are in your society.

a) Reflect on your own personal situation:

i) What is a perfectly competitive market that you interact with on a daily or weekly
basis?

ii) How many of the perfectly competitive market features does that market satisfy?
1. Many buyers and sellers
2. Easy entry into and exit out of the industry
3. Products are homogenous/identical
4. Resources are perfectly mobile
5. Perfect knowledge and information

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