Market Structures (Perfect Competition) Flashcards
Name all the conditions of Perfect Competition
- There’s an infinite number of suppliers and consumers, all very small, so no firm has any market power
- Firms are price takers, not price makers
- Consumers have perfect knowledge
- Producers have perfect knowledge
- All products are homogenous, and therefore perfect substitutes of each other
- There are no barriers to entry/exit
- Firms are profit maximisers (MR=MC)
In perfect competition, if firms are price takers, who/what is setting the price?
The (free) market
Are goods in a perfectly competitive market branded? If yes/no, why?
No, they are not branded. Because all products are homogenous (the same), and branding would create differences.
In terms of real world economics, what is it very important to remember about Perfect Competition?
It is just a model. No market is/will ever be perfectly competitive
What is meant in perfect competition, when ‘producers have perfect knowledge’ ?
No firm has any secret, low cost production methods
Every firm is aware of price changes by other firms
When does allocative efficiency occur? And why would it only ever occur in a perfectly competitive market?
It occurs when a good’s price is equal to what consumers want to pay for it.
And it would only ever occur in a perfectly competitive market because in perfect competition, the price mechanism ensures that producers supply exactly what consumers demand.
In perfect competition, why will no firm make supernormal profits in the long run?
Because, supernormal profits in the short run attract new firms to enter the market (no barriers to entry) which competes away these profits in the long run (by firms trying to undercut each other until only normal profit is made).
What acts as an incentive for firms to join the market in perfect competition in the short run?
Supernormal profits
What happens to the market/industry diagram when new firms enter the market?
The supply curve shifts to the right
What happens to the market equilibrium in a perfectly competitive market, when all supernormal profits have been competed away?
A new long run equilibrium is reached, at the lowest point on the firms AC (average cost) curve.
In regard to efficiency, what happens in a perfectly competitive market when the new long run equilibrium at the lowest point on the AC curve has been reached?
Firms are productively efficient, but also allocatively efficient because P=MC
In perfect competition, if a firm is unable to make a profit in the long run, what will it do?
Leave the market, made easy by the fact there are no barriers to exit
At what point in perfect competition, is a firm no longer making profit of any kind (normal profit) ?
If the market price falls below the lowest point on the AC curve
What would force a firm to leave the market immediately in perfect competition?
If the selling price (AR), falls below the firms AC curve in the short run
At what point are firms considered to have allocative efficiency?
P=MC
