Perfect Competition

Question 1

Pros of Perfect Competition?

Answer 1

• Always allocatively efficient (thus no DWL)
• Low prices for consumers (in the LR, when supernormal profits are competed away, prices fall)
• No inefficient firms (all high cost producers are forced to leave the market
• Responsive to consumer demand in the LR

Question 2

Cons of Perfect Competition

Answer 2

• Unrealistic Assumptions in the first place
• Firms are too small to take advantage of EOS (unable to lower AVC therefore less chance for price reductions for consumers)
• Lack of variation in products (all goods are homogenous = no choice for consumers)
• Unable to engage in r&d to make new products (because they aren’t able to make any supernormal profits in the LR therefore not dynamically efficient)