Perfect competition Flashcards
What is perfect competition ?
Where there is many buyers and sellers
Homogenous goods
No barriers to entry and exit
Perfect information
Firms are profit maximisers where MC = MR
What does long run mean in perfect competition ?
Where normal profit is being made , any profit outside normal profit is a short run equilibrium in perfect competition
Draw the long run equilibrium diagram
Draw the short run supernormal profit diagram and explain it
Short run position for firms in perfect competition , not going to last in the long run . This profit will attract new firms to enter the market with 0 barriers to entry
As they enter , supply shifts right , price falls until there is no incentive to enter the market ( no supernormal profit left ) and only normal profit is left
Draw the subnormal profit diagram , short run and explain it
Firms are incentivised to leave the market and to produce their opportunity cost instead can leave the market with no barriers to exit
As they leave , supply shifts left and price keeps going up until there is no incentive to leave and only normal profit is left
How does Perfectly competition link to allocative efficiency ?
In the long run they are allocatively efficiency as P=MC
Resources follow consumer demand and prices are lower causing higher consumer surplus , quantity and choice
How does productive efficiency link to perfect competition ?
PE is achieved as at Q2 , the lowest point on AC curve , there is full exploitation of economies of scale
How does x inefficiency link to perfect competition
They are X efficient as they are productively efficient and in the long run there is no supernormal profit so no productive efficiency , no progressino through innovation
