Perfect Competition

Question 1

Characteristics of perfect competition:

Answer 1

• many buyers and sellers
• price takers
• no barriers to entry and exit
• perfect knowledge
• homogeneous goods
• factors of production perfectly mobile
• firms in short run re profit maximisers

Question 2

How does a firm of perfect competition go from making SNP to normal profit?

Answer 2

1. The firm makes SNP
2. New firms enter the market as te market will seem profitable
3. New firms will increase supply
4. Lowers average price
5. Existing firms will be competed away

Question 3

Advantages of perfect competition:

Answer 3

• there is allocative efficiency P=MC
• firms produce on the minimum point so re productively efficient
• SNP in the short run can go towards dynamic efficiency

Question 4

Disadvantages of perfect competition

Answer 4

• in the LR, no dynamic efficiency
• firms are small so not many opportunities for EOS
• perfect competition is impossible, due to branding, product differentiation etc

Question 5

Contestable market

Answer 5

• A market with low barriers to entry and exit.
• There is a high degree of potential competition
• Not necessarily monopoly/oligopoly as just when it is possible for new firms to easily enter the market if they believed they could make a profit