Perfect Competition

Question 1

Name the characteristics of perfect competition

Answer 1

(Theoretical - not realistic)
1. Very many firms in the market (infinite)
2. No barriers to entry & exit
3. Homogenous — firms sell identical products
4. Perfect information

Question 2

Can firms control the price in the perfect competition? Why?

Answer 2

No, price is set by Supply&Demand.

All products are the same, if a firm setts a higher price, consumers would stop buying the good and would start buying it from other firms

Question 3

What happens to the price in Perfect Competition in the Long-run?

Answer 3

SNP would be competed away by the new entrants. Supply shift to the right, price falls. It goes down until firms only make normal profits (AC=AR) - bottom of AC.

Question 4

Is Perfect Competition statically/dynamically efficient?

Answer 4

1. Productive — YES, minimum AC
2. Allocative — YES, (MC=AR) (P=MC)
3. Technical — YES, firms make normal profits only, they cant allow their costs to rise => no X-inefficiency
4. Dynamic — NO, the don’t earn SNP to reinvest it