3.4.2 Perfect Competition

Question 1

what is a perfect competition?

Question 2

what are the assumptions of perfect competition?

Answer 2

1. firms aim to maximise profits
2. there are many participants (buyers and sellers)
3. the product is homogenous
4. there are no barriers to enter or exit the market
5. there is perfect knowledge of market conditions
6. there are no externalities

Question 3

what are homogenous goods?

Answer 3

goods that are identicle to one another

no brand loyalty or difference in quality

Question 4

what are the effects of having many participants and perfect knowledge?

Answer 4

no one has an advantage in using economies of scale because evryone does

Question 5

what do firms become in a perfect competiton?

Answer 5

price takers

Question 6

what are price takers?

Answer 6

must accept prevailing prices in a market,taking the ruling market price as its demand curve, lacking the market share to influence market price on its own

this means demand curve is perfecty elastic (AR=MR line)

Question 7

draw the firm in short run equilibrium diagram under perfect competitions

Answer 7

Question 8

draw the long run equilibrium under long run competition

Answer 8

Question 9

draw the diagram of adjusting to demand in perfect competition

Question 10

how long can supernormal profits be made in a perfectly competitive market?

Answer 10

only in the short run
* in the long run only normal profit and losses can be made

Question 11

in the long run for a firm in perfect competition what happens to
1. level of output of firm
2. level of output of industry
3. price level

Answer 11

1. falls because new firms enter
2. rise new firms enter market
3. decrease