Market Structures - Perfect Competition

Question 1

How many firms are likely in a perfectly competitive market?

Answer 1

Many of firms, none of which have a large market share

Question 2

What type of product is available to consumers in a perfectly competitive market?

Answer 2

Homogenous products

Question 3

What are barriers to entry and exit like in a perfectly competitive market?

Answer 3

No entry barriers at all

Question 4

How strong is the pricing power of individual firms in a perfectly competitvley market?

Answer 4

No one firm has price setting power- they are price takers

Question 5

What is the potential to earn supernormal profit it in the long run in a perfectly competitive market?

Answer 5

Normal profits (break even) in the long run and equilibrium

Question 6

Are firms allocatively efficient in a perfectly competitive market?

Answer 6

In both the short and the long run, price is equal to marginal cost (P=MC) and thus allocative efficiency is achieved.

Question 7

Are firms productively efficient in a perfectly competitive market?

Answer 7

Productive efficiency occurs when the equilibrium profit maximising output is supplied at minimum average cost. This
is attained in the long run for a competitive market.

Question 8

Why are firms unable to make supernormal profit in the long run in perfectly competitive markets?

Answer 8

If most firms are making abnormal (supernormal) profits in the short run, this encourages the entry of new
firms into the industry driven into the market by the profit motive.
This will cause an outward shift in supply, forcing down the ruling market price.
The increase in market supply will eventually reduce the ruling market price until price = long run average cost.

Question 9

Are firms in perfectly competitive markets dynamically efficient?

Answer 9

No, products are homogenous and there is little scope for innovation. Furthermore, the lack of any supernormal profit suggests that firms will not have the funds available
to reinvest.