Perfect Competition Flashcards
What is Market structure?
The market environment within which firms operate
What is perfect competition?
A form of market structure that reduces allocative and productive efficiency in long run equilibrium.
This is unique or perfect competition
What is a price taker?
A firm that must accept whatever price is set in the market as a whole
What is allocative efficiency?
Achieve when a consumer satisfaction is maximised. Shown on a market/industry diagram at S=D and consumer and producer services on maximised.
Shown on a firm diagram at P=MC
What is productive efficiency?
Attained when a firm operates at minimum average total cost choosing an appropriate combination of inputs (cost efficiency) and producing the maximum output possible for those inputs (technical efficiency) shown on a firm diagram at the bottom of the AC curve
What is a homogeneous product?
Because products are seen as identical by consumers, there is no brand loyalty, so all products are perfect substitutes
What is perfect knowledge?
Buyers and firms no prices charged by other firms, and no firm has a superior production technique
The market is perfectly competitive if…
1) Profit maximisation is an objective
2) There are many buyers and sellers
3) The product is homogeneous
4) There are no barriers to entry or exit
5) There is perfect competition
As firms arw price takers in this sense what does this mean for the demand curve?
Perfectly elastic demand curve
Why do price taker firms face a perfectly elastic demand curve for its product?
Because the quantity the firms sells is small compare to the size of the market, so does not influencer – meaning the AR for a sale equals MR for sale
Why cannot affirm sell above P0?
Because buyers have full knowledge of the market and will simply buy elsewhere.
Why cannot of firms sell below and still profit maximise?
 P0 is where MC=MR also the phone charges P0
What happens in the short-run?
Firms are making Super Normal Profit, this attracts competitors, entering the market without barriers to entry, shifting the industry supply curve to the right and lowers the market clearing price
What happens in the long-run?
Lowers SNP to zero
If profits fall below normal profits what would happen?
Some firms would leave the market as there are no barriers to exit. This shifts the industry supply curve to the left and raises the market clearing price. Long-run increases profits to a level where SNP are zero
In the short-run a perfectly competitive firm can be what?
Allocatively efficient, but not productively efficient because while P=MC, the firm is not producing at the minimum AC
In the long-run a perfectly competitive firm can be what?
Can be both allocatively and productively efficient; P=MC and the firm is producing at the minimum AC
How can the government influence the amount of competitiveness in a market?
1) Forced to make Profit maximisation as an objective
2) Increase the number of buyers and sellers
3) The product is homogeneous
4) There are no barriers to entry or exit
5) There is perfect knowledge
