Competitive equilibrium Flashcards
What are the characteristics of perfect competition?
- Infinite many of buyers and sellers
- Homogenous goods - price takers
- No barriers of entry/exit
- Perfect information
- Firms are profit maximisers (MC = MR)
What is short run equilibrium in perfect competition?
When supernormal profit is beng made which encourages firms to entry this market (barrier free, perfect info
What is long run equilibrium in perfect competition?
When normal profit is being made
TC = TR
Super-normal profit
Profits exceed normal profit
What is a free market?
Place where buyers meet suppliers to exchange goods, free from government intervention
What is another word for equilibrium?
Market clearning
Shows the market clearing price
What is equilibrium
Where demand = supply
What is allocative efficiency?
Where demand = supply
What did Adam Smith say about Free markets?
- Equilibrium in free markets represents allocative efficiency
- Even in disequilibrium free markets are able to reverse
What are the price mechanisms - with the abrev?
ARSI
Allocate scare resources efficiently
Ration scare resources by encouraging, dis .. concumption
Signal excess demand/ supply and need for increase/ de.. resources
Incentivise producers to increase/ de.. output to increase/de.. profit
What happens when there is excess demand?
Not allocative efficiency
Disequilibrium
e.g Birkin bag, waiting list prices rise as increase in consumers
What happens when there is an excess supply?
Contraction in graph, firms leave market
Signals a price decrease to get rid of stock
What happens when a supply and demand curve shifts?
Always disequilibrium
