Chapter 3 Competitive Markets and Perfect Competition

Question 0

Define price taker

Answer 0

A firm has to accept the price ruling in the market

Question 1

What are the five assumptions of perfect competition?

Answer 1

Price taker
Homogenous products
Freedom of entry and exit
Large number of buyers and sellers
Perfect knowledge

Question 2

Homogenous

Answer 2

All products are the same irrespective of who makes them

Question 3

Freedom of entry and exit

Answer 3

Any firm can enter the industry as there are no barriers to entry to keep them out

Question 4

Large number of buyers and sellers

Answer 4

This is to ensure that the product is sold and the firm is a price taker

Question 5

Readily available information

Answer 5

We assume that all firms have equal access to any technological improvements and that all firms have equal advantages. Thus firms are unlikely to engage in research and development as the results will be available to other firms

Question 6

Why is p=AR=MR=D

Answer 6

The firm is thus faces a perfectly elastic d curve. P is unaffected by variations in output and so the MR resulting from an increase in sales by one output is constant and equal to price

Question 7

Define allocative efficiency

Answer 7

The optimum allocation of scarce resources that best accords with consumers pattern of demand. Where P=MC.

Question 8

Optimum output

Answer 8

The optimum combination of fixed and variable factors that minimise AC

Question 9

Static efficiency

Answer 9

Efficiency at a point in time - includes allocative and productive efficiency

Question 10

Dynamic efficiency

Answer 10

Efficiency over time and concerns the production of new products, new techniques and new processes,and for firms to undertake investment in R+D they need to make supernormal profits.