Perfect Competition Flashcards

1
Q

What are the factors used to determine market structure?

A
  • Number of firms
  • product differentiation
  • ease of entry / barriers
  • extent to which information/ knowledge is perfect
  • influence of individual firms / suppliers on price
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2
Q

What are the objectives of a firm ?

A
  • Profit maximisation
  • sales maximisation
  • revenue maximisation
  • growth maximisation
  • market share
  • corporate social responsibility
  • quality
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3
Q

What is the divorce of ownership and control?

A

The owners and those who manage the firm are different groups and have different objectives. Only applies to PLCs

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4
Q

What is the principal agent problem?

A

The principal (owner) appoints an agent (manager) to perform tasks on their behalf
The incentives of the owner may differ from those of the manager

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5
Q

How do you cope with the principal agent problem?

A
  • Employee share - ownership scheme
  • shareholder activism
  • delist (buy all shares back)
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6
Q

What did Galbraith theorise about shareholders?

A

They are happy with reasonable profits which leads to Satisficing due to imperfect information

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7
Q

What are the factors of a perfectly competitive market?

A
  • Many small firms
  • homogeneous goods
  • all firms are price takers
  • perfect knowledge
  • freedom of entry / exit
  • Large number of buyers
  • factors of production are completely mobile
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8
Q

What are barriers to exit?

A

Sunk costs which are the start up costs you can’t get back
e.g. market research (can’t sell it on)

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9
Q

What are the statements to remember about the graphs showing the market and firms?

A
  1. We assume that all firms are short run profit maximisers - this occurs at Q when MC = MR
  2. Q, shows where output is (determined by marginals) to read profit you use averages
  3. This firm makes normal profit - this is because at Q AC is equal to AR
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10
Q

Why does MR = P on a firm graph?

A

It is the addition to the total revenue of selling one extra unit of a good, since the price is always the same, p=mr. The addition is always p

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11
Q

What would a firm do if they were making a sub normal profit?

A

They would leave the market as they have no barriers to exit and perfect factor mobility

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12
Q

What happens if a new firms enters a perfectly competitive market?

A

A new form entering a supernormal profit market is not advantageous for the old firm • they produce less as Q1 is shifted left.
Supernormal profit attracts new firms in the market (incentives them)

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13
Q

What is supernormal profit?

A

Where AC is lower than AR - occurs in the long run

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14
Q

When is the graph productively and allocativeley efficient ?

A

Q is productively efficient as it is the lowest AC
Allocative efficiency occurs at Q where P = MC

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15
Q

What happens when P is greater than MC?

A

Allocative inefficient signals to the firm to make more, consumes value the good at P. The MC of that good is less

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16
Q

What happens when P is less than MC?

A

Allocative inefficiency signals to the firm to make less, consumes value the good at P. The MC of that good is more

17
Q

Does a perfectly competitive firm have the means for dynamic efficiency?

A

No they do not
They also might

18
Q

Does a perfectly comp market have the incentive for dynamic efficiency?

A

Doesn’t - woulcht have the incentive for de because Q falls to Q1 and therefore P shifts down to PI eliminating supernormal profit
Does - perfect comp firm = supernormal profit in the short run as long as the red box P-AC exists there is incentive. Supernormal profit is the incentive.in the short run

19
Q

Where does sales Max occur?

A

At Q when AC = AR

20
Q

Where does Rev max occur?

A

Mr = 0

21
Q

Where does CSR occur?

A

Doesn’t as they have no means and no incentive