02.01. Perfect Competition (youTube)

Question 1

What is a basic assumption in perfect competition?

1.
2.
3.
4.
5.
6.
7.

Answer 1

• there are lots of buyers and sellers, for every buyer that goes a new one comes (same for sellers)
• a lot of market knowledge
• easy entry and exist to market
• changes in individual demand have no impact on changes in market demand (same for supply)
• price is seen as fixed (price takers)
• marginal revenue in price and demand same thing
• supplier produces exactly at the point where marginal cost is marginal revenue (P is max here)
• cost for individual supplier

Question 2

When is Profit max?

Answer 2

if MC is MR

Question 3

What happens if more suppliers enter the market?

Answer 3

• they force the price down, profits are reduced
• MC still equals Marginal revenue -> so individual supplier also has to lower own price
• even more suppliers enter until cost equals price, reduce of qtx of individual supplier
  -> cost and price are the same = economic profit = 0
• even mooore could enter, prices are falling, getting new qty, and we cost that is above price (economic loss)
• prices could fall until shut down point (any price below here and the firm shuts down)