Perfect Competition Flashcards
What is perfect competition?
A theoretical market that considers how firms behave when competition is perfect
What are 8 conditions of a perfectly competitive market?
- many sellers in the market
- zero barriers to entry and exit
- homogenous
- perfect knowledge
- perfectly mobile factors of production
- all firms the same size
- zero convenience advantages
- price takers
Why are there many sellers?
If there were only a few firms then consumers would lack choice as there would be limited substitutes (consumer choice/ substitutes)
Why are there zero barriers to entry?
Barriers to entry restrict competition so more barriers means less competition
Why are the goods homogenous?
If goods weren’t homogenous then consumers may prefer one good over another leading to the preferred good facing less competition
Why does there have to be perfect knowledge?
Perfect knowledge means consumers have full awareness of the prices and products in the market
If knowledge isn’t perfect then consumers aren’t aware of substitutes which may be better or cheaper
Why do the factors of production have to be perfectly mobile?
This means how well firms can access factors of production, therefore all firms have equal access to factors of production so there are no cost advantages
Why are all firms the same size?
Larger firms (output) have access to economies of scale therefore reduced costs, but perfect competition requires all firms to have equal costs of production
Why are there zero convenience advantages?
This refers to how easy it is to use a firm (e.g. easier to use a local shop over a supermarket that is miles away)
If one firm is easier to use than another they have a competitive advantage which can’t happen with perfect competition
Why do firms have to be price takers?
Firms have to take the market price and are unable to change the price as consumers will change to an identical substitute. Price cannot decrease as price is already at a minimum to remain in the market
