Discuss in detail the various equilibrium positions with the aid of graphs-PERFECT MARKET (Perfect Market)

Discuss in detail the various equilibrium positions with the aid of graphs-PERFECT MARKET. In economics, specifically general equilibrium theory, a perfect market, also known as an atomistic market, is defined by several idealizing conditions, collectively called perfect competition, or atomistic competition

Discuss in detail the various equilibrium positions with the aid of graphs-PERFECT MARKET (Perfect Market)

INTRODUCTION
A perfect market is a market structure which has a large number of buyers and sellers.
OR
The market price is determined by the industry (demand and supply curves).
OR
This means that individual businesses are price takers, i.e. they are not able to influence prices.
OR
Perfect competition is an imaginary situation, whereas monopolistic competition is a reality. 🗸🗸
[Accept any other relevant introduction]
[Max 2]

BODY-MAIN PART

• The indicating of the equilibrium positions on the perfect market structure is of utmost importance because from this point where MC = MR
• The dotted lines will be drawn to show economic profit or economics loss.
• Where the dotted lines intersect the AC and AR curves either normal profit or economic profit or economic loss will be indicated and shadowed.

ECONOMIC PROFIT

Mark allocation for graph:

• Position / shape of MC curve = 1 mark
• MR curve = 1 mark
• Position / shape of AC curve = 2 marks
• Equilibrium point = 1 mark
• Indication of price / quantity = 1 mark
• Shading of economic loss = 2 marks
  MAX MARKS = (8)

Allocate marks on the graph according to the rubric provided and if facts are duplicated again in writing, do not allocate marks. Max of 8 marks.

• Equilibrium is at E₁ i.e. where MC = MR
• At this point Q₁ goods are produced at a price of P₁
• The averages cost for Q₁ units is point R on the AC curve
• Price / AR is greater than AC ( TR > TC)
• Therefore economic profit is represented by the area P₁SRE₁

NORMAL PROFIT

Mark allocation for graph:

• Position / shape of MC curve = 1 mark
• MR curve = 1 mark
• Position / shape of AC curve = 2 marks
• Equilibrium point = 1 mark
• Indication of price / quantity = 1 mark
• Shading of economic loss = 2 marks
  MAX MARKS = (8)

Allocate marks on the graph according to the rubric provided and if facts are duplicated again in writing, do not allocate marks. Max of 8 marks.

• Equilibrium is at E₁ i.e. where MC = MR
• At this point Q₁ goods are produced at a price of P₁
• At equilibrium (point E₁) average cost is equal to price
• The AC curve is tangent to the demand curve which means that P/AR = AC (TR = TC)
• The business makes normal profit which is the minimum earnings required to prevent the entrepreneur from leaving the industry.

ECONOMIC LOSS

Mark allocation for graph:

• Position / shape of MC curve = 1 mark
• MR curve = 1 mark
• Position / shape of AC curve = 2 marks
• Equilibrium point = 1 mark
• Indication of price / quantity = 1 mark
• Shading of economic loss = 2 marks
  MAX MARKS = (8)

Allocate marks on the graph according to the rubric provided and if facts are duplicated again in writing, do not allocate marks. Max of 8 marks.

• Equilibrium is at E1, i.e. where MC = MR
• At this point Q1 goods are produced at a price of P1
• At equilibrium (point E1) price/AR is less than average cost/the AC curve is lies above the demand curve which means that P/AR < AC (TR < TC)
• The business makes an economic loss
  A maximum of 24 marks will be allocated for graph illustration and analysis:
  8 marks max per graph illustration – (Max 26 marks)

ADDITIONAL PART CONDITIONS
For a market to successfully operate under perfect competition, the following conditions should prevail at the same time:

• No firm can influence the market price (price takers) due to a large number of buyers and sellers
• Products are identical (homogeneous)
• There are no barriers of entry, meaning that there is freedom of entry and exit
• Buyers and sellers act independently – no collusion between sellers
• No government interference to influence the market – the market is unregulated
• Free movement between markets – all factors of production are completely mobile
• Both buyers and sellers have full knowledge of all the prevailing market conditions (perfect information)
• If any of the above conditions are not met, the market is regarded as an imperfect market
  Any 5 x 2 = [Max 10 marks]

CONCLUSION
Freedom of entry and exit into the perfect market alter the supply of goods on the market. This will result in changes in price which influences the profit or loss of a business.  If price falls to a level where it is equal to the AVC then the firm will shut-down.  [Max 2]