3.4 Market structures

Question 1

Perfect competition characteristics and efficiency?

Answer 1

Characteristics:

• many buyers and sellers
• perfect knowledge
• no barriers to entry or exit
• homogenous good is sold
• firms do not have price making power so AR is perfectly elastic

Efiiciency:

SR: allocatively efficient P=MC

LR: allocatively efficient, productively efficient

Question 2

Monopolistic competition characteristics and efficiency

Answer 2

Characteristics:

• slightly diffentiated goods e.g. toothpaste (allows price making power) so non price competition
• many buyers and sellers
• low barriers to entry and exit

Profit maximising in the short run but low BTE means firms come in so demand (AR) falls till tangential to AC. In LR only normal profit is made

Efficiency:

• not allocative or productively efficient in LR
• not dynamically efficient in LR due to normal profits but in SR maybe due to differentiated products as innovation is important