Perfect Competition

Question 1

What is perfect competition

Answer 1

Perfect competition is a market structure with many small buyers and sellers

Question 2

What are the key features of perfect competition?

Answer 2

1)many small buyers and sellers
2)no barriers to entry or exit
3)homogenous goods
4)perfect information

Question 3

What does it mean if there are no barriers to entry

Answer 3

No sunk costs, no patents, no economies of scale

Question 4

What are homogeneous goods?

Answer 4

The same goods

Question 5

What is meant by perfect information

Answer 5

Both consumers and producers know everything about the good.

Question 6

Perfectly competitive firms are…

Answer 6

Price takers

Question 7

MR DAR

Answer 7

D=MR=AR

Question 8

What kind of profits will firms make in the long run for perfect competition?

Answer 8

Normal profits but in the short run they can make supernormal profits

Question 9

Pros of perfect competition

Answer 9

Allocatively efficient in the long run
P= mc, consumer welfare is maximised
Productively efficient in the long run as firms produce at the lowest point of the ac curve where ac=mc

Make supernormal profit, mc=mr, in the short run as only incumbent firms are in the market.

Question 10

Cons of perfect competition

Answer 10

lack of quality in goods as all goods are homogeneous
Not dynamically efficient in the long run as they make normal profits