Perfect competition Flashcards
What are the assumptions of perfect competition?
Large number of identical firms]
Homogenous products
freedom of entry / no barriers
perfect information
What does the fact that there are a large number of identical firms selling homogenous products infer about firms pricing power?
All firms are price takers and price their goods at the industry market price as if charged more they would sell nothing but they wont profit max if charge below as they can sell as much as they want at market price.
What does the fact that there is freedom of entry and exit mean?
Supernormal profits acheived in the short run cant be maintained in the long run as new firms will enter the market due to the profit incentive. This will shift industry supply right and lower the market price until it equals ATC and a normal profit is acheived so firms stop entering. Price returns to normal but output rises.
What is productive efficiency?
Producing at the lowest possible cost (most efficiently) where ATC crosses the bottom of the MC curve.
How useful is perfect competition?
It is not real life, can only be used as a benchmark for competition and to judge how firms behave in competitive markets.
What if demand rises in the long run?
Firms make supernormal profits which attracts new entrants and eventually normal profits return, output increases but price is unchanged.
What are the benefits of operating in a perfectly competitive market?
Maximise efficiency - if overproduce, waste resources will go out of business
Product is produced in the right quantities to people who value them the most
How has e-commerce made markets more competitive?
Improved info - price comparison websites, online reviews
improved competition - lower start up costs, opens up market internationally
Increased price comp as rise in no.of retailers selling the same product
more buyers and sellerw
