Chapter 7.3

Question 1

The Assumptions of Perfect Competition

What are the assumptions of perfect competition?

Answer 1

-There is a large number of firms, they are price takers
-All firms produce identical goods
-There is free entry and exit
-There is perfect information

Question 2

Demand Curves for the Industry and the Firm in Perfect Competition

What is the demand curve for a good facing perfect competition?

Answer 2

They sell their goods at equilibrium price, being a horizontal line at Pe

Question 3

Long-Run Equilibrium in Perfect Competition

When will an industry be disrupted from its long-run equilibrium?

Answer 3

If something from an outside system causes disturbance, therefore they would be making profits and losses

Question 4

Long-Run Equilibrium in Perfect Competition

What are the factors that may cause disturbance?

Answer 4

-Change in demand
-Change in costs

Question 5

Allocative Efficiency

When does allocative efficiency happen?

Answer 5

Allocative efficiency occurs when firms produce the particular combination of goods and services that consumers mostly prefer.

Question 6

Allocative Efficiency

When is allocative efficiency achieved?

Answer 6

When P=MC

Question 7

Allocative Efficiency

When is there underallocation of resources?

Answer 7

When If P > MC

Question 8

Allocative Efficiency

When is there overallocation of resources?

Answer 8

When P < MC,

Question 9

Evaluation of Perfect Competition

What are the advantages of perfect competition?

Answer 9

-Allocative efficiency
-Low prices for consumers
-Competition leads to closing down of inefficient consumers
-Market responds to tastes

Question 10

Evaluation of Perfect Competition

What are the limitations of perfect competition?

Answer 10

-Unrealistic assumptions
-Cannot take advantage of economies of scale
-Lack of variety
-limited ability to engage in new product development