Market Structures - Perfect Competition Flashcards
Identify three characteristics of a perfectly competitive market.
- Large number of buyers. No individual buyer can influence the market price.
- Large number of sellers. No individual seller can influence the market price. Each seller is a price taker and accepts the market price.
- Homogenous goods. All the goods are identical and hence there is no need for advertising.
Explain, with the use of a fully labelled diagram (including the axes), the long run equilibrium of a firm in perfect competition. [E, Q, P, C, P, E]
- Equilibrium is at point E (Where MC = MR)
- Firms produce quantity Q
- They sell the output at price P
- Costs occur at level C
- The firm earns normal profits as AR=AC
- The firm is efficient as costs are at the minimum point of the ATC curve
Firms in perfect competition should not engage in advertising? Agree or disagree? Outline two reasons for your answer.
Agree
Homogenous goods = Since the goods are identical and no difference exists, an individual producer cannot differentiate their product so there is no point in advertising.
Increase cost / waste of scarce resources = If a firm was to advertise it would increase its own costs and decrease its profits/gains no additional revenue.
Explain one possible economic advantage and one possible economic disadvantage of perfect competition as a market structure
Advantage:
Low Prices = The firm sells its products at the lowest possible prices (there is no exploitation of consumers).
Disadvantage:
Little choice for consumers = As the products are homogenous, there is little choice for consumers.
The firm in perfect competition is a ‘price taker’, explain this statement
Each individual firm must accept the price as it is set in the market. Because each firm supplies such a tiny fraction of the market, it cannot influence the market price. Demand is perfectly elastic and if price increases above the prevailing market price then quantity demanded would fall to zero.
Draw the market demand and supply curve of a perfectly competitive firm
X
Draw the demand curve of an individual firm
-
Explain why firms in perfect competition don’t engage in advertising
A perfectly competitive firm will not advertise. Under perfect competition, all the firms sell identical or homogenous products. Thus, advertisements cannot influence the consumer preferences of products sold by different firms. Firms advertising in this market would not be maximising profits, because they are pushing up marginal costs unnecessarily and hence they would end up making a loss.
With the aid of labelled diagrams, explain the impact which the entry of new firms would have on the market on the equilibrium position of the firm
https://gyazo.com/ab5789bcc4b795dd5c9ab88bbd863847
Outline two advantages of perfect competition
Low Prices:
The firm sells its products at the lowest possible prices
Efficient:
The firm produces at the lowest point of average costs so there is no waste of scarce resources.
Outline two disadvantages of perfect competition
There is no chance to achieve the maximum profit because of the huge number of other firms that are selling the same products.
There is no incentive to develop new technology because of the perfect knowledge and the ability to share all of the information.
Explain the term supernormal profit
It is any profit earned in excess of normal profit (part of the AC). (It arises when AR is greater than AC).
Explain the reason for the shape of the demand curve of an individual firm in perf. competition
A firm in perfect competition is a price taker / it accepts the market price
Distinguish between price competition and non price competition
Price Competition:
Firms competing with one another by lowering their prices.
Non price competition:
Firms competing with one another but not on the basis of their prices, e.g. quality, special offers, money off coupons etc.
