Perfect competition

Question 1

1. If all firms operated in ‘perfectly competitive markets’, what benefits would be generated? Use a diagram to support your answer.

2. ‘A firm under perfect competition is faced with a perfectly elastic demand curve’. Do you agree? Justify your answer.

3. Mythica is an economy that used to operate under a military dictatorship, but has recently reformed and encouraged ‘free-market capitalism’ and free trade between itself and the rest of the world. Assume that the global market for MP3 players is currently perfectly competitive, with a global price of $100. A new firm starts up in Mythica selling MP3 players, and, so far, it is the only supplier. It currently sells its MP3 players for $150.

   1. Using diagrams, explain what is likely to happen to the market for MP3 players in Mythica

   2. Comment on prices, output and profits over the next 5 years.