Explain how the fixed and variable costs of a perfectly competitive firm affect its survival in the short and long run.

Mark scheme

Marking points from the official mark scheme (May/June 2020). The mark or mark type is shown in brackets.

1. Definitions of fixed and variable costs and long and short run. Need to cover variable cost in the short run, shut down if variable costs not covered in short run. Need to cover both fixed and variable cost (total costs) in the long run.
2. L4 (9-12 marks): For a thorough explanation of fixed and variable costs linked to both the short and long run, clear identification that all costs are variable in the long run, together with explanations of their relevance to the survival of a perfectly competitive firm.
3. L3 (7-8 marks): For an answer which concentrates on either the short run and the long run or variable and fixed costs with reference to profits.
4. L2 (5-6 marks): For limited correct comments on types of costs.
5. L1 (1-4 marks): For an answer which has some basic correct facts but includes irrelevancies. Errors of theory or omissions of analysis will be substantial.
6. L4 (9-13 marks): For an answer that clearly identifies the principal-agent (PA) problem. At least two objectives for firms identified and clearly linked to the PA problem The impact on profit, price and output for the firm and consumer. Accurate diagrams. Max 11 if no conclusion.
7. L3 (7-8 marks): For an answer that clearly identifies the principal-agent (PA) problem but is limits its consideration of the impact to the firm or the consumer.
8. L2 (5-6 marks): For an answer which defines the principal-agent problem with limited reference to its impact on a firms objectives.
9. L1 (1-4 marks): For an answer which has some basic correct facts but includes irrelevancies. Errors of theory or omissions of analysis will be substantial.