8- Perfect Competition Flashcards

1
Q

Perfect competition market

A

Extreme form of competition

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2
Q

Buyers and sellers?

A

Lots of buyers and sellers

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3
Q

Price setting power?

A

Price takers- no price setting power

Horizontal demand curve AR=MR

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4
Q

Barriers to entry/exit?

A

No barriers to entry/exit

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5
Q

Knowledge/ information?

A

Perfect knowledge and information

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6
Q

Aims of firms?

A

Profit maximisation

AR=MR

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7
Q

Short run shutdown point?

A

AVC> AR

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8
Q

Long run shutdown point?

A

AC>AR

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9
Q

Why do firms carry on producing even if they are making a loss?

A

Because they are covering AVC and making a contribution to fixed costs. If all costs are variable firm will leave the market, which is what happens in the long run as there are no fixed costs in the long run.

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10
Q

Long term profits?

A

Normal profits

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11
Q

Product homogeneity

A

All products are homogenous.

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12
Q

Scope for economies of scale?

A

No scope for economies of scale

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13
Q

Allocative efficiency?

A

Yes- P=MC in both short run and long run

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14
Q

X efficient?

A

Yes- on AC curve in both short and long run.

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15
Q

Productive efficiency?

A

Short run- no, MC not = AC

Long run- yes, MC=AC

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16
Q

Dynamic efficiency?

A

No- normal profit does not allow this.

17
Q

Pros of perfect competition

A
  • Allocative efficiency
  • Productive efficiency
  • X efficiency
  • Jobs (derived demand)
18
Q

Cons of perfect competition

A
  • No scope for economies of scale
  • No dynamic efficiency
  • Cost cutting in dangerous areas e.g. health and safety
19
Q

Evaluation of perfect competition

A
  • Dynamic efficiency could be possible (slight profits) (part of the competition)
  • Level of economies of scale
  • Where is cost cutting taking place- regulation?
  • Static vs dynamic efficiency- depends on good/service