Explain why a loss-making firm in perfect competition would shut down in the long run.

Discuss the view that perfect competition is a more desirable market structure than monopoly.

Answers may include:

• definitions of perfect competition and long run
• diagram(s) to show the shut-down point in perfect competition
• explanation of why a firm shuts down in the long run when a loss-making firm can cover its variable costs in the short run but cannot cover its total costs in the long run. It is not making a normal profit
• examples of markets which have features of perfect competition.

Marks should be allocated according to the Paper 1 markbands for May 2013 forward, part A.

Answers may include:

• definitions of market structure, perfect competition and monopoly
• diagram(s) to compare and contrast perfect competition and monopoly
• explanation that perfect competition has a number of advantages like lower prices, greater choice and allocative and productive efficiency compared with monopoly
• examples of markets which have features of perfect competition and monopoly
• synthesis or evaluation (discuss).

Discussion may include: reference to benefits of monopoly such as economies of scale, research and development, natural monopoly, and/or the disadvantages of monopoly (higher price, lower output). To focus on the word “desirable” in the question, discussion may also include the advantages and disadvantages of perfect competition.

Marks should be allocated according to the Paper 1 markbands for May 2013 forward, part B.