Perfect Competition

Question 1

What are the assumptions of a perfectly competitive market?

Answer 1

1. Number of agents: infinite number of buyers and sellers
2. Perfect information for both buyers and sellers in market
3. Homogeneous product
   1, 2, 3: firms are price takers (individual firm’s actions have no effect on market price)
4. Free entry and exit for all firms -> LR: all firms can only make breakeven profit (0 profit)

Question 2

What does allocative efficiency imply?

Answer 2

The efficient amount of goods are produced in the economy (demand = supply, no wastage/shortage) (tangible economic goods)
The total welfare (consumer surplus and producer surplus) is maximised (intangible well-being)

Question 3

What is consumer surplus?

Answer 3

Difference between what consumer is willing to pay for and what they actually pay for in the market

Question 4

What is producer surplus?

Answer 4

Difference between what producer is willing to sell and what he actually sells in the market

Question 5

In the long run, why is the MC curve above the AC curve?

Answer 5

The firm’s supply curve is shown by MC being above the minimal AC. Since the perfect competition industry has infinite firms, the supply curve of the industry is the sum of MC above the minimal AC for all firms