Industrial Economics: Lecture 2 - Perfect & Monopolistic Competition

Question 1

Assumptions & characteristics of perfect competition

Answer 1

• Large number of market participants (both buyers and sellers) - “atomistic”
• All market participants have perfect knowledge/information, no costs to information
• All goods & services are homogenous
• Firms act independently to maximise profits, no cooperation or game theory
• Firms are free to enter and exit the market at will, no costs & barriers to entry/exit

Question 2

Perfect competition graphically:

Answer 2

• Firm’s individual demand is flat! Perfect elasticity, firms are ‘price takers’
• PED (price elasticity of demand) = negative infinity, i.e. the slightest change in price will result in that firm losing all customers

Question 3

Perfect competition graphically (cont.):

Answer 3