3.4.2 Perfect Competition

Question 1

What is perfect competition?

Answer 1

A market structure in which individual firms have no market power due to the amount of competition and are therefore unavailable to influence price.

Question 2

What are the characterisitcs of perfect competition?

Answer 2

• Many buyers and sellers - sellers are price takers.
• There are no barriers to entry and exit from the industry.
• Buyers and sellers possess perfect knowledge of prices
• The products are homogenous (identical) - therefore demand is perfectly price elastic.

Question 3

Short run vs Long run for perfect competition?

Answer 3

In the short-run, firms can make supernormal profit or losses in perfect competition

However, they will always return to the long-run equilibrium where they make normal profit