Chapter 6, Perfect competition Small firms: is small beautiful? Video Solutions, Economics Theory in Action

Problem 1

Right-wing political parties are committed to the operation of free markets. Why, then, do you think that they tend actively to seek to support small firms?

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Suppose a perfectly competitive industry is in long-run equilibrium. Now suppose that there is an increase in demand for its output. Outline the steps that lead to the industry producing the additional output that consumers demand.

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01:33

Problem 3

Evidence suggests that for much of the post-war period in Britain the share of output of the largest 100 manufacturing enterprises was increasing but that the share of output of the largest 100 manufacturing plants was not. What does this suggest:
(a) about the significance of economies of scale?
(b) about the climate in which small firms operate?

Kaylee Mcclellan

Numerade Educator

02:04

Problem 4

Do you see any disadvantages in laws which prevent large firms from eliminating small firm competition by setting prices below average cost?

Karan Sood

Numerade Educator

Problem 5

When economists wish to illustrate the workings of the perfectly competitive system and the place of small firms in an industry, agriculture is the most commonly chosen example. How closely does this industry relate to the perfectly competitive model? Why is it an industry in which government intervention is massive in most countries?

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01:15

Problem 6

Many small firms find it difficult to change their bank and reduce their borrowing costs if they feel that interest charged for their borrowing is too high. Does this suggest the banks are operating a restrictive practice?

Kaylee Mcclellan

Numerade Educator

Problem 7

In the UK, the building societies have provided very effective competition for the banks in providing banking services for private customers. Could they do the same for small businesses?

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01:58

Problem 8

What economic case might be made for government action against banks charging high interest rates to small firms? What problems do you see with such action?

Kaylee Mcclellan

Numerade Educator

02:41