4.1 Perfect Competition Flashcards
Perfect competition
Marlet structure with many buyers and sellers that can achieve allocative and productive efficiency in the long run.
Price taker
An individual or firm that must accept the ruling market price as it lacks the power to influence the market price.
Homogenous products
There is no actual or perceived difference in products on the market.
Characteristics of perfect competition
Many sellers, many buyers, no barriers to entry, no barriers to exit, price takers, homogenous products and perfect knoweldge of the market.
Short run perfect competition
Market structure that has allocative efficiency but not productive efficiency.
Long run perfect competition
Market structure that has allocative and productive efficiency.
Productive efficiency
When a firm is operating at minimum cost, where MR=MC.
Allocative efficiency
When society is producing an appropriate bundle of goods and services relative to consumer preferences. In perfect competition, a firm produces goods to meet demand.
AC>AR in the long run
A firm should leave the market
The industry long run supply curve in perfect competition is….
horizontal at the price which is set by the minimum point of the long run average cost curve (based on the assumption all firms face identiical cost conditions).
AVC> AR
A firm should leave the market in the short run.
Supernormal profits are made in the
Short run
The demand curve in perfect competition is…
Horizontal (AR=MR=D)
