LS8 : Perfect Competition

Question 1

what are the six assumptions of perfect competition?

Answer 1

1. firms aim to profit maximise
2. many participants (both buyers and sellers)
3. product is homogenous
4. no barriers to entry or exit
5. perfect knowledge of the market and its conditions
6. no externalities

Question 2

explain the profit maximisation assumption for perfect competition.

Answer 2

the pursuit of self-interest by firms and consumers ensures the market works effectively

Question 3

explain the many participants assumption in perfect competition.

Answer 3

there are so many buyers and sellers that no individual trader is able to influence the market price. market price is thus determined by operation of the market. this makes them price takers.

Question 4

explain the homogenous product assumption in perfect competition.

Answer 4

means the buyer sees all products in the market as being identical, and will not favour one product over another. by ruling out the possibility of brand loyalty, no individual is able to influence the selling price in the market.

Question 5

explain the no barriers to entry or exit assumption in perfect competition.

Answer 5

firms are able to join the market is they perceive it to be a profitable step, and they can exit the market without hindrance. important when considering long-run equilibrium of the market.

Question 6

explain the perfect knowledge assumption in perfect competition.

Answer 6

assumed all participants have perfect information about trading conditions. buyers always know the prices that firms are charging so can buy the good at cheapest price possible. firms who charge above this will get no takers. traders are aware of product quality.

Question 7

explain the no externalities assumption in perfect competition.

Answer 7

externalities are ruled out in order to explore characteristics of perfect competition model.

Question 8

what is productive efficiency like in perfect competition?

Answer 8

feature of long-run equilibrium position. doesn’t occur in short run when a firm doesn’t need to be operating at minimum average cost

Question 9

what is allocative efficiency like in perfect competition?

Answer 9

achieved when price = marginal cost or when s = d. perfectly competitive firms achieve this in both short run and long run since they are price takers

Question 10

evaluate perfect competition.

Answer 10

• merely a theoretical ideal based on sequence of assumptions
• allows a glimpse of what an ideal market is like, which can be used as comparison
• can act as reference point when examining alternative market structures and resource allocation