3.4.2 Perfect Competition Flashcards
1
Q
What are the 5 conditions for a perfect market to exist?
A
- infinite buyers and sellers
- homogenous goods
- no barriers to entry or exit
- perfect imformation
- firms are profit maximers
2
Q
What is supernormal proft?
A
Profit made above “normal profit”
3
Q
Why can supernormal profit not be made in the long run in a perfectly competitive market?
A
Firms are price takers. They operate due the conditions of supply and demand. Also known as “hit and run” profit
4
Q
Why can supernormal profit only be achieved in the short run in a perfectly competitive market?
A
-no barriers to entry
-perfect information
New firms enter the market, the supply curve shifts to the right from S to S1, causing the price to fall, will keep happening until all of the supernormal profit has been eroded away.
