5.3 Perfect competition Flashcards
is perfect competition a theoretical extreme
YES FOR CHRIST SAKE YES
what are the characteristics of a perfectly competitive market structure
many buyers and sellers (infinite)
homogenous/ identical goods/ services
firms are price takers as all demand is lost if raise, if lower prices don’t gain any market share/ no extra profit not worth it
no barriers to entry/exit
perfect information
assume firms are profit maximisers mc=mr
what profit can only be made in the long run in perfect competition?
normal profit
why can’t firms make supernormal profit in the long run
supernormal profit in the short run attracts new firms into the market, and they can enter due to the characteristic of the market ( low barriers to entry, perfect information) as they enter the market supply shifts to the right the price then falls until their is no more incentive to enter the market and only normal profit is being able to be made
why can’t firms make subnormal profit in the long run?
subnormal profit won’t last in the long run due to the incentive for firms to leave the market and produce their opportunity cost instead as it is illogical to produce when making subnormal profit, they can leave the market as their is no barriers to exit so its costless to leave the market. as they leave the market supply shifts to the left price will be driven up until their is no incentive to leave/only normal profit is left.
is perfect competition allocatively efficient?
yes, as in the long run the market supplies products/services where S=d e.g. price = marginal cost
(resources are perfectly following consumer demand, prices are low, consumer surplus is high, quantity and choice is high)
is perfect competition productively efficient
yes firm is operating at lowest point of average cost curve, this means full exploitation of economies of scale
is perfect competition X efficient
yes as producing on average cost curve, therefore minimising costs and waste
is perfect competition statically efficient is so why do they have to be?
yes as such intense competition they will not survive in the market
is perfect competition dynamically efficient?
no as no supernormal profit is able to be achieved in the long run so firms don’t have to profit to reinvest into the company so consumers may not be able to see new tech and producers may not be able to lower theirs costs so market cant progress via innovation
what is the shut down condition for firms in the short run?
if price (ar) equals minimum point of average variable cost curve than it will shut down because they can not cover their fixed costs of production
what is the shut down condition for firms in the long run
firms have to make at least normal profit, so if price (ar) is lower than average cost it will shut down.
