4.1 Perfect Competition Flashcards
What are characteristics of a perfectly competitive market
Many buyers and sellers
Sellers are price takers
Fresh entry and exit
Perfect knowledge
Homogeneous products
Firms short run profit maximise
What determines price is a perfectly competitive market
Price is determined by the interaction of demand and supply
What is likely to happen to profits in a competitive market
Profits are likely to be lower than a market with only a few large firms
Every firm in a competitive market has small market share
New firms enter if it seems profitable which increases supply and the existing profits are competed away
What happens to the profit maximising equilibrium in the short run in a perfectly competitive market
In the short run firms can make supernormal profits
Firms are price takers so accept industry price
What would the diagram for short run equilibrium for a perfectly competitive market look like
What happens to the profit maximising equilibrium in the long run in a perfectly competitive market
Firms enter as they see the supernormal profits.
This increases supply making the price level fall and as firms are price takers they accept this
Supernormal profits are competed away so firms can only make normal profits in the long run
What would the diagram for long run equilibrium for a perfectly competitive market look like
Advantages of a perfectly competitive market
Lower prices in the long run as there is allocative efficiency
Firms produce at the bottom of AC curve meaning there is productive efficiency
Supernormal profits from short run might increase dynamic efficiency through investment
Disadvantages of a perfectly competitive market
In the long run dynamic efficiency might be limited due to lack of supernormal profits
Since firms are small there are few or no economies of scale
Model is rarely a reality as most markets have competition that is imperfect
