1. From the evidence provided in the table what type of market do you think Professor Birks would be entering? Would you enter this market? Explain your reasoning (5 marks).
From the data within the table, it is evident that Professor Birks is operating in a perfectly competitive market. Features of a perfect competition include a large number of small firms, identical and homogeneous goods, perfect market knowledge and no barriers to entry and exit due to low sunk costs. Such conditions mean that firms in perfect competition are price takers, since the level of competition means that no firm has sufficient market power to be able to individually influence the market price. This is evident from the table since average revenue is constant at every output (number of haircuts per week). Average revenue (AR) is revenue per unit, and since average revenue is constant marginal revenue - the revenue generated from selling one extra unit of a good or service – must also be constant too for every output produced. Since average revenue = demand (D) and average revenue = marginal revenue, it can be deduced that D=AR=MR. Therefore, demand is perfectly elastic meaning that for every unit of output produced, the price charged per unit will always been the same. AR is only constant in perfect competition
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Short run cost curves are u shaped due to the law of diminishing returns. Professor Birk’s SRAC falls initially due to specialisation and increasing productivity that lower his average total costs. In the short run Professor Birks’ capital is fixed (such as plant size and machinery). However, other factor inputs such as labour are variable in the short run, therefore meaning that when demand, for example, of Professor Birk’s haircuts increase, he is able to increase employees’ working hours and hire more workers. Greater productivity can then occur when more labour is added to fixed