Perfect competition Flashcards
What are the assumptions of perfect competition?
-Large numbers of producers
-Identical products
-Freedom of entry and exit (no barriers)
-Readily available information
Large numbers of producers…
In perfect competition, there are a large number of producers in the market. Each firm is relatively small in size and sell to a large number of small buyers. All of these producers are price taker (i.e. they are not large enough to influence price).
Each firm can sell all of its output at the current market price. Therefore, it would not lower price.
This means that the demand curve for each firm is perfectly price elastic.
Identical products…
In perfect competition all products are identical. Buyers cannot tell the difference between products from different firms. Therefore, no branding of products/brand loyalty does not exist.
Freedom of entry and exit…
In perfect competition there are not barriers to entry of exist. Therefore, entry cost are low or non-existent.
Perfect knowledge…
All economic agents have comprehensive understanding of factors within a market.
What is monopolistic competition?
Monopolistic Competition exists where there are a large number of firms in the market selling differentiated products. This leads to a small degree of monopoly power as each firms offers something different to the others.
In this type of market barriers to entry are very low. Therefore, it is easy firms to enter the market. This creates strong.
Advertising and product differentiation
Advertising and product differentiation are important in monopolistic competition.
Firms will advertise to establish loyalty and repeat custom by making the consumer aware of the product and persuading them to use it through informative and persuasive advertising.
These are often niche markets as the economies of scale that lead to the creation of highly concentrated markets are not available in monopolistic competition. This allows smaller firms to compete against larger frims.
Why does profit maximisation occurs when MC=MR? (use PP)
What is normal profit?
The minimum rewards required for a firm to remain in an industry.
This is classed as an opportunity cost as staying in the industry is just better than the next best alterative.
In the long run a firm will leave if the industry if it cannot make a normal profit (it will purse the next best alternative i.e. opportunity cost).
What is supernormal profit?
Any profit above normal profit. If firms in an industry are seen to be making supernormal profit other firms will look to join the industry.
These supernormal profits are competed away if there is a high degree of competition in the market. If the market is less contestable (e.g. monopolies) then these firms have the power to restrict competition and make more supernormal profit in the long run.
What is the role of supernormal profit/profit in the market economy?
Supernormal profits create incentives for firms to increase production and for new firms to enter the industry. This has a significant impact on the allocation of resources in an economy.
Firms use retained profit to reinvest, for example into R & D. This helps to develop new products and improve production processes, leading to dynamic efficiency.
What is the short-run shutdown point?
In the short run a firm will continue to produce as long as the price is greater than the average variable cost.
Above this point it makes a contribution to paying off its fixed costs. Sunk costs have already been paid so they are they are irrelevant to the decision.
The shut-down point occurs when price falls below your average variable costs, firms are now better off closing down as it actually makes a loss on each additional unit produced.
What is the long-run shutdown point?
In the long run all costs can be seen to be variable as there opportunity to
