9. perfect competition

Question 1

what do we assume about a perfectly competable market

Answer 1

large number of sellers
no brand identity or marketing
homogenous products
very contestable
low barriers to entry and exit
perfectly elastic demand curve

Question 2

do firms make profit in a perfectly competavble market

Answer 2

abnormal profits in the short run due to changes in demand and supply

normal profits in the long run due to profit being competed away

Question 3

what does perfectr competition look like on a diagram

Answer 3

normal demand and supply diagram with a price line going through too another diagram showing P=MR=AR

Question 4

why do prices go down in the long run in perfect competition, and how can you show this on a diagram

Answer 4

if most firms are making abnormal profits, new firms will enter due to the profit motive.

can be shown by an outwards shift of supply causing P=AR=MR to go down

Question 5

is perfect competition efficient

Answer 5

in the short and long run, P=MC so it is allocatively efficient

AC=MC, so it is productively efficient

therefore it is statically efficient

no abnormal profit in the long run means it is not dynamically efficient