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In the short run, both the perfect competitor and monopoly are equally able to make supernormal profits. Their long run profitability, however, is quite different due to their unique market structure characteristics.
On Graph One above, show the profit maximising output level for the perfect competitor in the short run, and label it Qe.
Using marginal analysis, explain why the perfect competitor might not choose to produce at output level Q1 AND output level Q2.
On Graph One, show the long run price (label PLR) and profit maximising output (label QLR) for the perfect competitor by adding a new MR1 = AR1 = D1.
On Graph Two above, show the:
Refer to the characteristics of perfect competition and monopoly, and Graphs One and Two in your answer to part (c).
Compare and contrast the long run profit maximising output and profit levels of the perfectly competitive firm and the monopoly.
Explain why the perfectly competitive firm is allocatively efficient and the monopoly is not.
Natural monopolies are considered desirable despite the inefficiencies they create. This is because they can supply the entire market at a lower price than two or more firms.
The Government might allow a natural monopoly to maximise profit despite the inefficiencies it creates.
On Graph Three above, show the natural monopolist operating at profit maximising by:
Referring to the characteristics of a natural monopoly, Graph Three, and the resource material above, explain why the Government might prefer not to encourage competition.
An alternative is to regulate the natural monopoly to average cost pricing.
On Graph Four above, show the natural monopolist operating at average cost pricing by:
Instead of regulating the natural monopoly, the Government could allow it to continue to operate at profit maximising, and impose a targeted tax on the supernormal profit it makes.
Refer to Graphs Three and Four and the resource material in your answer to part (b).
Compare and contrast the impacts on the natural monopolist of a targeted tax on supernormal profits (profit maximising) and being regulated to average cost pricing.
In your answer, consider effects on:
Due to the increasing number of claims in recent years, insurance premiums have risen significantly. This is having an effect on all businesses.
Explain why an increase in insurance cost increases average cost but does not affect marginal cost.
Graph Six shows the average cost curve increasing to AC1 for the individual perfect competition firm as a result of higher insurance cost.
On Graph Six above, identify and label the:
Graph Five shows the new market equilibrium price and quantity (Pe1 and Qe1) in the long run as a result of the type of short run profit made by the firm.
Explain the short and long run price and profit situation for the individual firm following an increase in their average cost. Refer to the characteristics of perfect competition, and Graph Five and Graph Six in your explanation.
A recession is defined as two consecutive quarters of negative economic growth. It is often accompanied by rising unemployment and low consumer and business confidence.
Graph Seven shows the new market equilibrium price (Pe3) and the quantity (Qe3) in the long run as a result of the type of short run profit made by the firm following the recession.
PLR1 and QLR1 on Graph Eight are the long run profit maximising price and output level for the perfect competition firm.
Refer to Graphs Five, Six, Seven, and Eight in your answer.
Compare and contrast the impact of an increase in average cost and a recession on the long run market equilibrium quantity. In your answer, explain why the market quantity decreases more under a recession.