Perfect Comepitition

Question 1

State the 4 characteristics of a perfectly competitive firm

Answer 1

• many small buyers and sellers.
• no barriers to entry or exit - this means no economies of scale, no patents, no sunk costs = firms can easily enter/ exit the market
• Homogeneous goods - all goods are the same
• Perfect information - consumers know all the prices firms a charge and producers know how other producer produce their goods = everyone knows everything

Question 2

Are firms price takers in a perfect competitive market, yes or no

Answer 2

Yes

Question 3

Why does a perfectly competitive firm end up with a perfectly elastic demand curve

Answer 3

If prices are put up even just abit, consumers will stop buying completely because they’re so sensitive to price changes. They’ll immediately switch to another seller in the market - consumers have perfect knowledge of markets.

Question 4

What are price takers

Answer 4

they take the market price and sell for that price

Question 5

What type of profit does a perfectly competitive firm make in the short run

Answer 5

supernormal profit

Question 6

Describe what happens to profit for a perfectly competitive firm in the long run as we move from the short run to the long run

Answer 6

• there are no barriers to entry and perfect information = everyone else will know profit is being made, incentivising them to enter = new suppliers will enter the market and start selling = the supply in the market will increase
• As long as there is supernormal profit in the market, supply will continue to shift outwards - more people will join market.
• the supply will continue increasing until AR touches the bottom of the firm’s AC and all the supernormal profit is gone = no more incentive to enter the market so we have reached the long run equilibrium

Question 7

What type of profit can be made in the long run

Answer 7

only normal profit can be made

Question 8

If a firm is making a loss in the short run what will they do and state what will happen to supply and profit as this happens

Answer 8

they will leave the market and this is easy to do because there is no barriers to exit.
- As firms leave the market, supply decrease and prices will increase back up, until normal profit can be made.
- At this point, firms will be covering their opportunity cost - so they’ll no reason to leave the market anymore. Which means we’ve reached ourlong runequilibrium - where firms are making normal profit

Question 9

State what competition can result in

Answer 9

Efficient allocation of resources