3 - Competitive Markets and Perfect Competition Flashcards
What is a perfectly competitive market?
Large number of small firms
What is an oligopoly?
Few large firms dominate industry.
What is a monopoly?
One firm dominates industry.
7 Assumptions in a perfectly competitive market.
1) Large number of buyers and sellers
- Firm is a price taker
- All products sold
2) No one firm large enough to affect the market price.
3) Perfect market
- Buyers and sellers have perf knowledge of products sold.
4) Homogenous products
- Consumers buy from cheapest provider
5) Freedom of entry and exit
- Firms can leave if they are not making normal profit
6) Readily available information
- All firms know about any inventions
- Firms may not innovate or R&D
7) Firms factors of production are perfectly mobile.
- Firm can undertake any type of work in any location
Negatives of perfect competition and what economists use it for.
Unrealistic
But economists use it for a benchmark for efficiency in markets
Therefore competition is welcome.
What is meant by phrase ‘price takers’
Firms Get prices from market equilibrium price.
Why wont firms in a perfectly competitive market raises prices above the MEP?
Because their consumers will switch to firms with lower prices as all goods are homogenous
Why wont firms lower prices to below the MEP?
Because even though they will increase their consumer amounts, they will not be maximising returns.
When producer and consumer suplus’ are maximises, what does this mean?
ALLACOTIVELY EFFICIENT.
What happens when a firm is making short run supernormal profits?
Other firms will allocate their resources to that market due to no barriers to entry, and firms will do this until all the supernormal profit is competed away as the S curve shifts to the right and price falls, therefore revenue has to fall because firms MC would be larger than MR if they didn’t.
The profit has been ‘APPROPRIATED’
Where are normal profits on a graph?
Where ATC = AR
Explain SR supply in a perfectly competitive market.
The amount that MC is above AVC = the supply curve.
If price increases = Supply increases
Therefore more price increases the more supply curve extends DUHHH
What can the structural performance and conduct model be used for ?
To see how an industry may operate.
What happens at the equilibrium point MC = MR
1) Optimum output (ATC at lowest point)
2) Productive efficiency
3) MC = Price of the last unit
4) Allocatively efficient
5) therefore firms in perf comp likely to be statically efficient.
What is dynamic efficiency? And how can firms achieve it?
Efficiency over time
By R&D
