Tutorial 8 Industry Application Questions PDF

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Tutorial 8 – Industry Application QuestionsNote: for water supply industry, think of Sth Aust situation only in all industry applied questions Explain how your industry compares against each of the important conditions that define a perfectly competitive market structure. Is your industry a perfectl...

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Tutorial 8 – Industry Application Questions Note: for water supply industry, think of Sth Aust situation only in all industry applied questions

1. Explain how your industry compares against each of the important conditions that define a perfectly competitive market structure. Is your industry a perfectly competitive industry? 4 marks + 1 mark The café industry is a booming and up and coming industry, that relies on competition to improve its stance in the overall economy. There are important conditions for a industry to be perfectly competitive, in which it needs to meet for this to be the case. These four are: Every firm sells a standardised product, many buyers and many sellers, enter or leave freely and well informed (buyers and sellers). In the café industry, every firm sells a coffee product, which is the standardised product of that industry, they may sell different beverages along with coffee and food, however, coffee is a standard product across all café’s. There are a lot of sellers in this industry, with thousands of cafes in the market, big and small players, this follows with a lot of consumers, with millions of Australian’s purchasing coffee as their standard product every day – this meets the necessary condition. Cafés and coffee shops can enter or leave the market extremely freely without major regulation or effect. As there are so many coffee shops and cafés, one that leaves will make very little difference on the market, unless a larger market share café operator left the market, this would then ultimately take the price down. This is the same with entering, many can enter freely without any change to regulation or market price. The last condition is that they are well informed, this being the case as most consumers and buyers understand the conditions, prices and outcomes of the products within their industry. Most players understand the price that needs to be set and consumers understand the product they are receiving for the price they pay. The café’ and coffee shop industry is perfectly competitive in this case, as it meets all the requirements of this competition.

2. How does each firm in a perfectly competitive industry decide the price they will charge, and the quantity they will sell? Explain. 3 marks In a perfectly competitive industry, all prices are set by the market’s supply and demand and no one supplier or firm can influence this in any way. This implies that they are a perfectly elastic demand curve, showing that if the price is set above the market equilibrium, the demand will be zero. This is not set by regulation, yet a café will soon learn if they set a price above the equilibrium that their demand will be zero until the law of demand and supply takes effect, returning it to equilibrium. This is always the case, but café’s will understand this more and see an effect more as its perfectly elastic.

3. Is it possible for firms in a perfectly competitive industry to make an economic profit or an economic loss in the short run? Explain, using a diagram. 5 marks In the short run, it is possible for a perfectly competitive industry to make an economic profit and loss. The economic profit will be determined by the costs of the product in comparison to the price, which can only be determined in the short run. This is not accounting profit, which can only be determined after gross profits – expenses....