This document contains sample responses to past exam questions on perfect competition. It includes: 1) An explanation of why a perfectly competitive firm can only make abnormal profits in the short-run using diagrams, as new firms enter in the long-run bringing prices and profits down. 2) A discussion of why a loss-making firm in perfect competition would shut down in the long-run, as it cannot cover its total costs. 3) A potential response discussing the advantages of perfect competition over monopoly in providing lower prices, greater choice and efficiency, and examples of each market structure.

1. Perfect Competition Essay Question (IB)
IB ECONOMICS – 1.5 THEORY OF THE FIRM AND MARKET
STRUCTURE (HL ONLY)

2. Past Paper Questions
Using diagrams, explain why a perfectly competitive firm can make economic (abnormal) profit
only in the short run. [10 marks]

3. Past Paper Questions
Using diagrams, explain why a perfectly competitive firm can make economic (abnormal) profit
only in the short run. [10 marks]
Answers may include:
• Definitions of perfect competition, economic (abnormal) profit and short run
• Diagrams of economic (abnormal) profit in the short run and normal profit (zero economic profit) in the
long run
• An explanation of how economic (abnormal) profit acts as a signal for new firms to enter the market,
shifting market supply to the right until normal profits are restored
• Examples of markets where this might occur.

4. Explain why a loss-making firm in perfect competition would shut down in the long run. [10 marks]
Past Paper Questions

5. Past Paper Questions
Explain why a loss-making firm in perfect competition would shut down in the long run. [10 marks]
Answers may include:
• Definitions of perfect competition and long run
• Diagram(s) to show the shut-down point in perfect competition
• An explanation 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.

6. Discuss the view that perfect competition is a more desirable market structure than monopoly.
[15 marks]
Past Paper Questions

7. Past Paper Questions
Discuss the view that perfect competition is a more desirable market structure than monopoly.
[15 marks]
Answers may include:
• Definitions of market structure, perfect competition and monopoly
• Diagram(s) to compare and contrast perfect competition and monopoly
• An 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.