perfect competition Flashcards
What is perfect competition?
A theoretical extreme market structure used to assess the efficiency of real-world market structures.
What are the characteristics of a perfectly competitive market?
- Infinite buyers and sellers
- Homogeneous goods and services
- Firms are price takers
- No barriers to entry and exit
- Perfect information about market conditions.
What does it mean for firms to be price takers?
Firms have no ability to set their own prices and must charge the market price.
What is the long run equilibrium in perfect competition?
Defined as when normal profit is being made, with no tendency for the market to change.
What happens to supernormal profit in the long run?
It attracts new firms to the market, shifting supply to the right and lowering prices until only normal profit remains.
What are the effects of subnormal profit on firms in perfect competition?
Firms will be incentivized to leave the market, causing supply to shift left and prices to rise until normal profit is achieved.
How do firms achieve profit maximization in perfect competition?
By producing where marginal cost (MC) equals marginal revenue (MR).
What is allocative efficiency?
Achieved when price equals marginal cost, indicating resources are allocated according to consumer demand.
What is productive efficiency?
Occurs when firms operate at the lowest point on the average cost curve, fully exploiting economies of scale.
What is X efficiency?
Achieved when firms minimize waste and costs, ensuring all resources are used efficiently.
What are the three types of static efficiencies that are achieved in perfect competition?
- Allocative efficiency
- Productive efficiency
- X efficiency.
True or False: In the long run, firms in perfect competition can achieve supernormal profit.
False.
What is the relationship between competition and efficiency in perfect competition?
Intense competition forces firms to be statically efficient to survive.
What is the consequence of the lack of supernormal profit in the long run for firms?
Firms cannot reinvest in innovation, leading to a lack of dynamic efficiency.
Fill in the blank: The market structure that serves as a benchmark for assessing efficiency is called _______.
perfect competition.
What happens to the market when new firms enter due to supernormal profits?
Supply shifts to the right, causing prices to fall.
What is the significance of perfect information in a perfectly competitive market?
Consumers and producers know about prices, quality, technology, and costs, facilitating efficient market functioning.
How do firms respond to making subnormal profits?
They will exit the market since there are no barriers to exit.
What is the effect of supply shifting left in the market?
It drives the price up until normal profit is achieved.
Why is dynamic efficiency not achieved in perfect competition?
Firms lack supernormal profits to reinvest in innovation and new technologies.
