Perfect competition Flashcards
CHARACTERISTICS
no barriers
price takers
many buyers and sellers
homogenous goods
profit maximisers
little innovation
Why is supernormal profit only made in the short run
supernormal profits attract others to the market - easy to join with low barriers to entry
supply increases - rightwards shift - price decreases
lower price is set where only normal profit can be made
why do firms leave this market often
because they’re incentivised to produce their opportunity cost when only normal profits are being made
why do firms leave this market often
because they’re incentivised to produce their opportunity cost when only normal profits are being made
what happens to the market after many firms leave
supply decreases and the price then increases -sets a new level of normal profit
Benefits of perfect competition
SHORT RUN: allocatively efficient (P=MC)
LONG RUN:
productively efficient/x-efficiency (lowest AC) - benefiting from economies of scale.higher SNP
allocatively efficient : max consumer surplus. high consumer choice and low prices.producers gain market share , meeting customer wants
sales max (AR=AC) : economies of scale- large production.
Cons of perfect competition
Loss of dynamic efficiency - reduces innovation. less chance of lowering costs
Not a lot of consumer choice - might not be truly allocatively efficient and increase consumer surplus
evaluate perfect competition
Static efficiency is most beneficial to customers due to lower prices - but they have no consumer choice so having dynamic efficiency would be beneficial for r&d to receive heterogeneous goods/better quality
Firms may be forced to reinvest in order to stay ahead of rivals in a highly competitive market so they may not always be dynamically efficient
