3.4.2 Perfect Competition Flashcards
What are the characteristics of perfect competition
- homogenous goods (price-taker),
- low barriers to entry
- profit maximisers
- economic profit in the long run (S+D)
- perfect information
What type of profits can firms in a perfectly competitive market make in the short run
Subnormal profit
Supernormal profit
Why is it only in the short-run that perfectly competitive firms can make a supernormal profit
high amounts of profit will attract firms as low barriers to entry
leading supply to shift to the right
leading to prices falling
What does the long-run graph look like for a perfectly competitive firm
Why can perfectly competitive firms make subnormal profits in the short run
Firms may be forced to leave the market if shutdown point is reached (AR=AVC)
and little barriers to exit
Supply will then contract inwards, pushing prices up, so subnormal profits are no longer being made
What efficiencies do perfectly competitive firms fall under
productively
allocative
x-efficient
Meaning they are statically efficient
What are the pros of a perfectly competitive market
Statically efficient
X-efficient - leading to minimal waste
Allocative efficiency - resources follow demand and consumer surplus is maximised
Productively efficient - lower prices, higher consumer surplus
creating jobs
What are the cons of a perfectly competitive market
lack of dynamic efficiency leading to less innovation/poorer quality
lack of economies of scale leading to lower output
is the cost-cutting in some areas moral
new firms outcompeting old leading to jobs losses
List some evaluation point of perfectly competitive firms
- Could still be dynamically efficient with short term supernormal profit
- static vs dynamically efficient which one is more beneficial
- levels of economies of scale - are they needed
- cots cutting could lead to regulation
