Perfect Competition Flashcards
What is the formal diagrammatic analysis of the perfectly competitive model in the short and long run?
In perfect competition, firms are price takers, and the market determines the price. In the short run, firms can make supernormal profits or incur losses. In the long run, the entry and exit of firms lead to a situation where firms make normal profits, and the market reaches equilibrium.
How do large numbers of producers, homogenous products, low barriers to entry and exit, and perfect information affect firms and the industry?
1)Large Numbers of Producers Ensure no single firm can influence the market price, leading to a perfectly elastic demand curve for each firm
2)Identical Products: Homogeneous products mean consumers have no preference, and firms compete solely on price
3)low barriers to Entry and Exit: Allows firms to enter when profits are attractive and exit when they are not, leading to normal profits in the long run
4)Perfect information: Ensures all firms and consumers have complete information, leading to efficient resource allocation.
Why are firms operating in perfectly competitive markets price takers?
Firms are price takers because the market price is determined by the intersection of industry supply and demand. Individual firms cannot influence the price due to the large number of producers and identical products
How does perfect competition result in an efficient allocation of resources?
Under perfect competition, firms produce at the point where marginal cost equals marginal revenue, leading to allocative efficiency. Additionally, firms operate at the minimum point of their average cost curve, achieving productive efficiency. These conditions ensure that resources are allocated in a way that maximizes total welfare.
