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
why they not dynamically efficient
lack of supernormal profit in the long run- earn normal profits in the LR
what is static efficiency (what 3 efficiencies is this about)
when a firm is as efficient as it can be at a particular point in time
refers to how well resources are allocated at a specific point in time
productive, allocatively efficient and x efficient
are perf comp firms x efficient
yah
in short run or long
long run
why
the constant pressure to minimize costs and maximize output.
what is static efficiency (what 3 efficiencies is this about)
measures how effectively a firm uses its inputs (like labor, capital, and materials) to produce output, without wasting resources.
whats examples in this industry in real life
Agriculture markets, online markets, farmers markets, fish market
what are 2 advantages of perfect comp
allocative efficiency- In the long run, firms produce where price (P) = marginal cost (MC), meaning resources are allocated efficiently.
No deadweight loss, leading to maximum consumer and producer surplus meaning the consumer exploitation is low.
productive efficiency - firms produce at the lowest point of their Average Cost (AC) curve in the long run, minimizing waste.
Consumers get goods at the lowest possible price.
This also allows firms to charge at the lowest possible cost which further drives competition. Only the most efficient firms can survive in the long run, ensuring resources are used effectively.
what are the disadvantages of perfect comp
lack of dynamic efficiency- no supernormal profits in the long run means firms lack funds for research & development (R&D).
Less innovation compared to monopolies or oligopolies. If firms do not invest in research, development, or process improvements, they may not adapt to shifts in consumer preferences, production techniques, or external shocks like new regulations.
