50) Perfect Competition

Question 1

What are the assumptions of perfect competition?

Answer 1

1) Infinite number of buyers and sellers
2) Perfect information
3) Homogenous products
4) No barriers to entry and exit
5) Homogenous factors of production
6) There are no externalities

Question 2

What is a price taker?

Answer 2

This occurs when a firm or consumer has no option but to accept the price set by the market

Question 3

What happens under perfect competition in the LR?

Answer 3

1) The quantity of the product supplied in the market equals the quantity demanded by all consumers
2) Each firm in the market maximises its profit, given the prevailing market price.
3) Each firm in the market earns normal profits only (no incentive for other firms to enter the market)

Question 4

What are normal profits?

Answer 4

Normal profit is the profit just sufficient to keep a business in their current market in the LR
Where MC = MR, AC = AR (price)

Question 5

What is productive efficiency?

Answer 5

When output is produced as cheaply as possible (occurs when the firm is producing at the lowest AC)

Question 6

What is Allocative efficiency?

Answer 6

Achieved when the market provides goods and services that meet consumer needs and wants. (Price = MC)

Question 7

What is Monopsony power?

Answer 7

A monopsony means there is one buyer and many sellers