Cambridge International as and a level Economics Ebook

SELF-ASSESSMENT TASK 
7.9
Study the diagrams in 
Figure 7.16
 and then answer the questions that follow.
1 
Describe each fi rm’s position with respect to profi t.
2 
If market demand increased and price rose to 
P
1
, 
how would it aff ect each fi rm?
3 
According to the theory of perfect competition, what 
will then happen?
4 
What output does a fi rm in perfect competition 
choose?
5 
How can an individual fi rm increase its profi ts?
Firm 1
Output
Output
Output
0
MC
ATC
AVC
D
= AR = MR
P
1
P
1
P
1
P
Firm 2
0
MC
ATC
D
= AR = MR
Firm 3
0
MC
ATC
D
= AR = MR
Figure 7.16 
Perfect competition – three diff erent cost situations
165
Chapter 7: The price system and the microeconomy 

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that there is freedom of entry into the market, which will 
threaten the existence of abnormal profi t in the long run. 
By a combination of marketing and product innovation, 
individual fi rms may be able to postpone the long-run 
equilibrium if the total market is growing.
At the heart of this model of competition is the fact that 
there are a large number of competitors using a combination 
of price and non-price competition to try and increase their 
market power. If there are few barriers to entry, then their 
success will only be temporary. Th
ere are many typical 
examples of this market structure in operation. Take-away 
food outlets and local privately owned restaurants are