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The diagram below represents the long run equilibrium of a firm in Perfect Competition - Leaving Cert Economics - Question 1 - 2016
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. Write each of the six underl... 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 - 2016
Step 1
Copy the diagram into your answer book. Write each of the six underlined labels in full.
Answer
The labels are as follows:
- P (Price): This refers to the amount of money that buyers are willing to pay for the good or service.
- Q (Quantity): This indicates the amount of the good or service that is produced and sold in the market.
- AC (Average Cost): This is the per-unit cost of production, calculated by dividing total cost by the number of units produced.
- MC (Marginal Cost): This represents the additional cost incurred from producing one more unit of the good or service.
- AR (Average Revenue): This is the average revenue earned per unit sold, which in perfect competition equals the market price.
- MR (Marginal Revenue): This is the additional revenue gained from selling one more unit of the good or service.
Step 2
Equilibrium occurs at point G on the diagram.
Answer
- The price the firm will charge for its output (use label P1): At equilibrium, the price the firm will charge is represented as P1.
- The output the firm will produce in equilibrium (use label Q1): The equilibrium output produced by the firm is indicated as Q1.
Step 3
Explain the underlined term.
Answer
Perfect Knowledge: In a perfectly competitive market, perfect knowledge implies that all consumers and producers are fully informed about the prices, quality, and availability of goods. This information allows consumers to make informed purchasing decisions, ensuring resources are allocated efficiently.
Step 4
State two other characteristics of perfect competition.
Answer
- Many buyers and sellers: There are numerous participants on both the buyer and seller sides of the market, preventing monopolies and ensuring competition.
- Free entry and exit: Firms can enter or exit the market without barriers, allowing for adjustments in supply based on market conditions.
Step 5
Write brief notes explaining each of these two other characteristics.
Answer
- Many buyers and sellers: This characteristic implies that no single buyer or seller can influence the market price. Each firm sets its own output level based on the market price determined by industry-wide supply and demand.
- Free entry and exit: This ensures that if firms in the industry are making supernormal profits, new firms can enter the market, increasing supply and driving down prices until only normal profits are made. Conversely, if firms incur losses, they can exit the market, reducing supply and pushing prices back up.
Step 6
State one reason why sporting organisations may not favour the above measure.
Answer
Loss of Advertising Revenue: Sporting organisations often depend on advertising revenue from alcohol brands. Banning such advertising could lead to a significant reduction in funds, affecting their financial stability and ability to host events.
Step 7
State and explain two other measures which could be taken to help reduce the consumption of alcohol in Ireland.
Answer
- Introduce Higher Taxes: Increasing taxes on alcohol products can deter consumption by raising prices, making it less accessible to consumers.
- Regulate Availability: Implementing stricter regulations on where and when alcohol can be purchased, such as limiting hours of sale, can reduce overall consumption by making it less convenient to buy.
Step 8
Outline two benefits to society of reduced alcohol consumption.
Answer
- Reduced Pressure on Healthcare Services: Lower alcohol consumption can lead to fewer hospital admissions related to alcohol-related illnesses, decreasing the burden on public health services.
- Increased Productivity: With reduced alcohol consumption, workers are likely to experience fewer health issues, leading to less absenteeism and greater productivity in the workforce.