Market Structure-4.1 Perfect Competition Flashcards
Perfect competition
Market structure with many buyers and sellers that can achieve allocative and productive efficiency in the long run.
Price taker
An invidiual or firm must accept the ruling market price as it lacks the power to influence the market.
Characteristics of perfect competition
Many buyers and sellers, no barriers to entry, no barriers to exit, price takers, homogenous products, perfect knowledge in the market.
What shape is the average cost curve?
U-shaped
Where does the Marginal Cost curve dissect the Average Total Cost curve?
At the lowest point
What is the level of profit maximisation output in perfect competition?
Where MC=MR (so where those two curves meet).
When do firms in perfect competition make supernormal profits?
In the short run
In perfect competition, in what position is the AR or Demand curve?
It is horizontal and is perfectly elastic.
What type of efficiency is P=MC?
Allocative efficiency
In the long run, what has happened to supernormal profits in a perfectly competitive market?
They have been removed because more firms have joined the market and therefore the market price has fallen so all firms operate where MC=ATC=MR.
Homogenous products
There is no actual or perceived difference in products on the market.
AC>AR in the long run
A firm should leave the market
Allocative efficiency
When society is producing an appropriate bundle of goods and services relative to consumer preferences. In perfect competition, a firm produces goods to meet demand.
The industry long run supply curve in perfect competition is….
horizontal at the price which is set by the minimum point of the long run average cost curve (based on the assumption all firms face identiical cost conditions).
AVC> AR
A firm should leave the market in the short run.
