Perfect Competition (3.4.2) Flashcards
What is Perfect Competition?
A market structure in which individual firms have no market power due to the amount of competition and are unable to influence the price
Is there an example of a Perfect Competition market?
There are few industries which fit this type of market structure, one example may be agriculture but government interferences may prevent it from being so. In reality, the assumptions made rarely hold and no market is completely perfectly competitive
What are the characteristics of Perfect Competition?
- Many buyers and sellers- Due to amount of competition, firms are price takers
- No barriers to entry and exit from the industry- Relative ease in which firms can start-up or leave an industry, which increases the levels of competition
- Buyers and Sellers possess perfect knowledge of prices- If one seller lowers price, all buyers will know about it
- The products are homogenous- Firms unable to build brand loyalty as perfect substitutes exist and any price change will result in losing all customers. Demand is perfectly price elastic
Are firms in Perfect Competition Price Takers or Price Makers?
Price Takers due to large number of sellers
What does Perfect Competition look like on a graph for an individual firm as well as in the market?
Slide 17
What happens if firms in Perfect Competition make supernormal profit in the short-run?
New entrants are attracted to the industry. They are incentivised by the opportunity to make supernormal profit and the no barriers to entry so its easy to join the industry
Why do firms in Perfect Competition always make normal profit in the long run?
Firms making a loss leave the industry and firms making supernormal profit slowly are eradicated as new firms join the industry (more supply)
When does Profit Maximisation occur on a graph?
MC=MR
What type of efficiency is Perfect Competition?
Productively efficient since they produce where MC=AC. Also allocatively efficient since they produce where P=MC.
