3.4.2 Flashcards
Name 5 of the 7 characteristics of perfect competition
- Assumes goods are homogeneous
- Assumes there’s infinite buyers and sellers of the homogeneous good
- All firms are price takers
- All firms are profit maximizers
- Super-normal profit is only available in the short-run
- Assumes there’s perfect knowledge
- There’s no barrier to entry or exit within the market
What does homogeneous mean?
Identical in every regard.
What does it mean to be a price taker?
They take the market price for a good as they’re unable to affect the market price.
What is profit maxmisation?
This is when firms want to make the most money possible.
This is when MR=MC or where the gap between TC and TR is the largest.
In what ‘run’ is super-normal profit available in perfect competition?
In the short-run.
What does it mean to be in the short-run?
This is when only the variable factors of production can be changed.
Only labour and raw materials.
How many graphs are there for perfect competition
3 and they come in pairs.
On a graph, how do you know when there’s super-normal profit being made?
When, AC < AR.
As in, the lowest point of the AC curve is below the AR curve
On a graph, how do you know when there’s normal profit being made?
When, AC = AR.
As in, when the AC curve and the AR curve go through each other.
On a graph, how do you know when there’s subnormal profit being made?
When, AC > AR
As in, when the lowest point AC curve is above the AR curve.
What kind of profit is made in the long-run in a perfect competition market structure?
Normal profit
