Evaluation of Perfect Competition (PC) Flashcards
1
Q
Importance of efficiency in resource allocation
A
- economic goal that a gov wants to achieve
- limited resources
- pdtn has to be efficient to maximise output
- satisfy human wants
2
Q
Merits of PC firms
A
- Productive efficiency
- Allocative efficiency
3
Q
Demerits of PC firms
A
- No dynamic efficiency
- Lack of variety in product range
- Unable to employ economies of large-scale pdtn
4
Q
Productive efficiency definition
A
- least-cost combination of inputs
- to produce a given lvl of output
- lowest possible AC
- pdtn at min pt of LRAC
5
Q
Productive efficiency (+ve)
A
- LR: all FOP are variable
- Firm can choose best combi of inputs
- w lowest possible cost for any given output lvl
- no wastage in use of resources
- competition; easy of entry and exit of rival firms
- force firms to produce at lowest possible AC to stay in industry in LR
- comp % firms spurs productive efficiency
6
Q
Allocative efficiency definition
A
- allocation of resources
- result in producing socially desirable combi and qty of gds & svcs
- no under/over pdtn
- society’s welfare is maximised
- illustrated by consumer-producer surplus approach
7
Q
Consumer and producer surplus approach (Allocative efficiency)
A
- allocative efficiency achieved when sum of consumer and producer surplus is maximised
- draw diagram
8
Q
No dynamic efficiency
A
- ability to generate new pdts and ideas, usually thru R&D
- incentive and ability
- PC firms unable to engage in R&D (due to normal profits)
- lack of funds in LR
- no incentive to innovate as new development will be copied by rival firms due to perfect knowledge
- dynamically inefficient
9
Q
Lack of variety in product range
A
- homogenous pdts
- identical
- lack of variety for consumers to choose from
- consumer welfare not maximised
10
Q
Unable to enjoy economies of large scale pdtn
A
- small
- unable to enjoy EOS that could lead to lower AC of pdtn that could be passed onto consumers (lower px)
