3.4 - Perfect Competition

Question 1

What are the assumptions of a perfectly competitive market?

Answer 1

Homogenous products
Perfect Information
No entry/exit barriers
Identical costs
Normal long run profits
Price taking firms

Question 2

What can occur in the short run within a perfectly competitive market?

Answer 2

Economic profit
Economic loss

Question 3

When does the shutdown point occur?

Answer 3

When MR < AVC

Question 4

Where is the break even point?

Answer 4

MR/D = ATC

Question 5

Why do firms make a normal profit in the long run?

Answer 5

Abnormal SR profit encourages entry
Causes outward shift in market supply
Forces down market price
Price = LRAC

Question 6

How does subnormal profit lead to normal long run profits?

Answer 6

Subnormal profit encourages exit
Firms leave, market supply shifts in
Forces market price up

Question 7

Are perfectly competitive markets allocatively efficient?

Answer 7

Yes
Long run and Short run
P = MC

Question 8

Are perfectly competitive markets productively efficient?

Answer 8

In the long run
Output operates at lowest point of AC

Question 9

Are perfectly competitive markets dynamically efficient?

Answer 9

Arguable in the short run
Not in the long run
No supernormal profit in LR

Question 10

What are the general benefits of perfect competition?

Answer 10

Fair prices for consumers
Equality - All consumers have access to same products
No wasted costs

Question 11

What are the general disadvantages of perfect competition?

Answer 11

Lack of consumer choice
Growth restricted
Cannot achieve economies of scale