3.4.2

Question 1

Characteristics of perfect competition

Answer 1

-many buyers and sellers.
- sellers are price takers
- free entry to and exit from the market
- perfect knowledge
- homogeneous goods
- firms are short run profit maximisers
- factors of production are perfectly mobile

Question 2

What kind of profit can firms make in the short run

Answer 2

In the short run, firms can make supernormal profits

Question 3

What kind of profit can firms make in the long run

Answer 3

In the long run where profits are competed away, only normal profits are made

Question 4

Advantages of a perfectly competitive market

Answer 4

In the long run, there is a lower price
P=MC, so there is allocative efficiency
Since firms produce at the bottom of the AC curve, there is productive efficiency
The supernormal profits produced in the short run might increase dynamic efficiency through investment

Question 5

Disadvantages of a perfectly competitive market

Answer 5

In the long run, dynamic efficiency might be limited due to the lack of supernormal profits
Since firms are small, there are few or no economies of scale
The assumptions of the model rarely apply in real life