Explain how a firm maximises its profit in perfect competition.

Mark scheme

Marking points from the official mark scheme (Oct/Nov 2019). The mark or mark type is shown in brackets.

1. An explanation of the profit maximising rule based on MC = MR. Explanation of how when MC and MR are unequal a firm changes its level of output to increase profits.
2. L4 (9-12 marks): For a sound explanation of increasing output when MC is less than MR and reducing output when MC is greater than MR to bring equilibrium when MC = MR.
3. L3 (7-8 marks): For an explanation of equilibrium increasing output when MC is less than MR or reducing output when MC is greater than MR to bring equilibrium when MC = MR.
4. L2 (5-6 marks): For an explanation of equilibrium when MC = MR.
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. A comparison of long-run profit and the difference that exists between the different forms of competition. Idea of contestable markets may mean that profit maximisation cannot be achieved due to hit-and-run competition, or there may be other objectives. Different strategies can be identified in relation to different market structures, e.g. in perfect competition and monopolistic competition long-run profit maximisation would apply, whereas in oligopoly and monopoly other strategies may be appropriate, e.g. sales revenue maximisation.
7. L4 (9-13 marks): For a sound discussion of two market structures and two strategies. (Max. 11 if no conclusion).
8. L3 (7-8 marks): For an analysis of either two market structures and one strategy or one market structure and two strategies.
9. L2 (5-6 marks): For a limited comparison of a strategy between two forms of competition.
10. 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.