Perfect Competition

Question 1

Types of barriers to enter (3)

Answer 1

Capital costs
Sunk costs = not recoverable = advertising
Legal barriers = patent

Question 2

What is limit pricing

Answer 2

Firms set lower prices than they would charge if they wanted to maximise short run profits

Question 3

Anti competitor practises (2)

Answer 3

This is used as a way to restrict competition
Such as refusing to sell to a retailer who also buys their goods from a competitor

Question 4

Barriers to exit (3)

Answer 4

Costs + time to make employees redundant
Sell premises + stock
Contracts with suppliers = harder to leave

Question 5

Types of goods (2(

Answer 5

Homogenous = identical
Heterogenous = slightly different

Question 6

How firms effect each other (4+)

Answer 6

Independant or dependant
Independant = one forms actions have no effect on another’s = normally when there’s perfect informati9n
Dependant = actions impact = fewer firms
Dependant implies uncertainty

Question 7

Characteristics of perfect comp (4)

Answer 7

Many firms
Freedom of entry/ exit
Perfect knowledge
Homogenous

Question 8

Demand and revenue in perfect competition (3)

Answer 8

Many buyers + sellers = price takers = accept price set by market
Demand = elastic = many alternatives
Only normal profits can be made

Question 9

What do we assume in short run

Answer 9

Firms are profit maximisers

Question 10

Diagram for perfect competition SR (3)

Answer 10

Demand = perfectly elastic
MC cuts MR from below
AR = higher than AC = abnormal profits

Question 11

Perfect completion = long run (4+)

Answer 11

Won’t make loss or abnormal profits
Lower barriers to enter/exit attract new firms
Drives prices down to where equilibrium is achieved at AC= AR
AC=AR=MC=MR