Competitive Markets Flashcards
1
Q
What are the assumptions of perfect competition? (5)
A
Large no. of buyers and sellers Homogenous products Perfect information No entry/exit barriers Price takers
2
Q
Why will perfect competition lead to an efficient allocation of resources? (2)
A
Lack of externalities
Economies of scale
3
Q
What are the benefits of perfect competition? (5)
A
No information failure Only normal profits made Maximum possible consumer surplus Allocative efficiency Productive efficiency
4
Q
Why are only normal profits possible with perfect competition?
A
If more sellers enter the industry, supply will shift right, which brings down the price. Because they are price takers, this decreases the profit maximisation point
5
Q
What are some examples of perfect competition?
A
Agricultural markets
6
Q
What is a price taker?
A
Cannot affect the market price, has a perfectly elastic demand curve
