WAEC Economics 2013 Theory — Question 11

Model answer

(a) Perfect competition is a market structure in which there are many buyers and a large number of sellers of a homogenous (identical) product. (b) Both a perfect competitor and an imperfect competitor attain equilibrium where MC = MR, and MC cuts MR from below. Both can make abnormal profit in the short run; the cost curves are the same, but the demand curves differ: for the perfect competitor, the MR and AR (demand) curves are the same (a perfectly elastic, horizontal demand curve), while for the imperfect competitor, the MR and AR curves are not the same (the demand/AR curve is downward-sloping, with MR below it). [Diagrams: short-run equilibrium for a perfect competitor showing a horizontal AR=MR line intersecting MC and ATC; short-run equilibrium for an imperfect competitor showing downward-sloping AR and MR curves intersecting MC.] (c) Features of an imperfect market: (i) The demand curve of the firm is downward sloping. (ii) Products are not homogenous (they are differentiated). (iii) There are entry barriers. (iv) There is no perfect information available to buyers and sellers.