perf comp Flashcards
assumptions of perf comp (7)
Infinite number of suppliers (sellers) and consumers (buyers)
Consumers and producers have perfect knowledge of prices/ products/ costs/ production methods etc
Homogenous products (identical)- perfect substitutes
Freedom of entry and exit for firms- low barriers
Firms aim to maximise profit
No economies of scale (cant influence market price as theyre price makers so they adapt to it)
Firms are ‘price takers’ - each firm has no control over prices as they don’t make the prices. If a firm charges above the market price no one will buy. They will go to other firms. There is no reason to price low as consumers will buy just as much as the market price.
do firms make supernormal profit in the short run in perf comp
yeah
how can they do this (you got this dawg- think graphz)
if the market price is above their ATC
do firms make supernormal profit in the long run in perf comp
no
why dawg (2 characteristics)
increase in supply due to entry and exit- leads to a decrease in market price as new firms enter as they’re price takers not markers to adhere market price
homogenous products- identical or homogenous so there is no brand loyalty or differentiation that would allow a firm to maintain higher prices and supernormal profits
what is the shut down rule
A firm should continue to produce as long as the price is above the AVC
When the price falls below AVC then the firms should minimize its losses by shutting down
If the price is blow AVC the firm is losing more money than their fixed costs. They should provide nothing minimize losses
what is productive efficiency
producing at lowest possible average total cost
are perf comp firms productively efficient
yas
when are they productively efficient (SR or LR)
LR
what is allocative efficiency- where is this on a graph
maximizes consumer satisfaction
when p=mc so the goods produced are exactly what consumers desire, and no resources are wasted.
also, d=s and ms=mc
are perf comp firms allocatively efficient
yas
when are they allocatively efficient
LR
why is it long run efficient for prod and alloc (this may be a harder one gng think graph placements)
your so clever don’t worry x
In the long run, as firms enter or exit the market based on profitability, the market price adjusts to the point where firms make zero economic profit. At this equilibrium, the price will equal marginal cost (P = MC) and marginal cost will equal average total cost (MC = ATC), leading to both allocative and productive efficiency.
what is dynamic efficiency
a firm’s ability to adapt and improve its productivity over time in response to changing markets, technologies, and customer preferences in the long run by investing in research and development
are perf comp firms dynamically efficient
na
