Model of perfect competition + is it good

Question 1

Diagram

Answer 1

24th September diagram

1. Demand for this product increases, pushing the price up to P2 so firms AR and MR are now at P2
2. The firm is now making SNP (AC>AR)
3. SNP sends a signal to other entrepreneurs and creates an incentive for them to enter this market
4. No b+e/e so firms can enter
5. New firms entering the market increase S(CNEWS) to the industry so no SNP is made in the long run

Question 1

Assumptions

Answer 1

• No market power
• Perfect knowledge
• No b+e/e
• All products are homogeneous – no brand loyalty
• Perfect mobility – All FoP are geographically + occupationally mobile

Question 2

Is it good for consumers

Answer 2

• Allocatively efficient
• Low prices
• Many options of firms to buy from

Question 3

Is it bad for consumers

Answer 3

• Homogeneous products
• Dynamic efficiency

Question 4

Is it good for producers

Answer 4

• Can easily enter/leave
• X+ Productively efficient
• Many customers
• Guaranteed profit in the LR

Question 5

Is it bad for producers

Answer 5

• NO SNP in LR
• No brand loyalty