Perfect Competition Flashcards
What is PC
Perfect competition occurs when there are no barriers to entry/exit for firms, they have perfect information and there are a large number of firms in the market - no single firm has a large market share
What is the relationship between SR and LR prices in PC
SR equilibrium price = LR equilibrium price. You can show PC equilibrium by doing a supply demand and cost revenue diagram side by side
Evaluating perfect competion
Always productively and allocatively efficient
Consumer prices will be low, as otherwise firms would be undercut
X efficient
No ability for firms to grow or experience EoS, so is it worthwhile for firms to keep producing. No dynamic efficiency
Product variety - the assumption that products are homogenous is oversimplified and firms may try to differentiate their products to make profit
How does the SR adjust to the LR in PC
When price is not at Pe, firms leave or enter the market, because there are no barriers to entry and there’s perfect info
