Perfect competition

Question 1

2 advantages for a business of operating in a perfectly competitive market

Answer 1

• No need to compete on price (price takers)
• Expected that the firm will be able to sell all of its output

Question 2

2 disadvantages for a business of operating in a perfectly competitve market

Answer 2

• Unable to make supernormal profit in LR (no economies of scale, dynamic efficiency)
• Too small to influence prices (must be price taker)

Question 3

Criticise perfect competiton

Answer 3

• most firms have some amount of price setting power
• rare for entry or exit to be costless
• patents and control of intellectual property are ignored
• impossible to avoid search costs

Question 4

Give 2 examples of markets considered to be close to perfect competition

Answer 4

agricultural or foreign currency markets

Question 5

Although perfect competiton is productively and allocatively efficient in the long run it is not…

Answer 5

dynamically efficient

Question 6

Many buyers and sellers e.g.

Answer 6

Many sellers: In India farming accounts for over 1/2 (over 120 million) of all jobs.
Many buyers: agricultural produce are highly demanded in all indian foods.

Question 7

low barriers to entry e.g.

Answer 7

most people in India are already in possession of land via inheritance. Results in few startup costs to farm.

Question 8

homogenous goods e.g.

Answer 8

overall temperature and humidity levels are the same across India so farmers grow same type of crops and these would harvest in the same seasons.

Question 9

Perfect competition

Answer 9

is a theoretical model market structure characterised by the existence of perfect systemical information, many buyers and sellers, no barriers to entry or exit and homogenised goods in the market

Question 10

Name the 5 assumptions of perfect competition

Answer 10

numerous buyers and sellers
perfect info
homogeneous goods
no barriers to entry or exit
no firm controls the market

Question 11

numerous buyers and sellers in detail…

Answer 11

infinite no. of buyers and sellers and each buyer and seller are small relative to the market. Therefore any action from either is too small to affect the entire market

Question 12

perfect info in detail…
consider when a firm raises it price

Answer 12

buyeres and sellers know market price. so if a firm raises its price it will loose all its customers as all buyers know the price is lower at other firms.

Question 13

Homogeneous goods in detail

Answer 13

exactly same goods = exactly same costs for firms.

Question 14

no barriers to entry/ exit
consider if SN (supernormal) Profits
consider if Losses

Answer 14

firms can enter and leave without cost

if SN profits are made then more firms enter this only leaves normal profits

if losses are made then more firms leave market only leaves normal profit

Question 15

In perfect competition demand is

Answer 15

elastic

Question 16

Regardless of whether firms leave or
enter over time, total surplus is

Answer 16

maximised in the market

Question 17

However in a pure monopoly

Answer 17

there is a deadweight loss due to reduced
production and lower consumption so monopoly power reduces total surplus

Question 18

EV: Time frame

Answer 18

depends on how quickly a firm can enter market to make supernormal profits in SR

Question 19

EV:
Efficiency depends on externalities present or not.

Think about another efficiency/ies unachieved

Answer 19

if externalities are present, then this would lead to a misallocation of resources and in effect allocative inefficiency.

In PC dynamic and x efficiency are not achieved.