Perfect Competition

Question 1

Disadvantages of perfect competition

Answer 1

1.Dynamic efficiency in the long run is limited because of no supernormal profit
2.Small firms means there is low/no economy of scales
3.The model can’t really happen as goods can always differentiate through marketing, branding and more

Question 2

Advantages of perfect competition

Answer 2

Price =MC in the long run so it’s allocative efficiency
Firms produce at the bottom of the AC curve so there is productive efficiency
Supernormla profit proxies increase dynamic efficiency

Question 3

Why can’t perfect competition make supernormal profit in the long run?

Answer 3

Because if a firm is making supernormal profit then it attracts firms to join , with low barriers of entry, the market until the market share is spread between more frims , supply increases making cheaper price so only normal profit.

Question 4

6 characteristics of perfect competition

Answer 4

1.Homogenous goods
2.No barriers to entry/exit
3.Many buyers and sellers
4.Sellers are price takers
5.Short run profit maximisers
6.Perfect knowledge