Perfect Competition Flashcards
Assumptions of perfect competition
- homogenous products
- all firms have access to factors of production
- larger number of buyers and sellers
- perfectly elastic demand curve
- perfect knowledge / information
What is the key objective within a perfectly competitive market
Profit maximisation
Examples of homogenous (standardised) products
Flowers
Cement
Wheat
Total revenue curve in a perfectly competitive market
TR is a diagonal straight line passing through the origin
How does a rise in market price influence the gradient of the total revenue curve
It increases the gradient of the TR curve
Are firms price makers or price takers
Price takers
When can firms make losses in the SR
If the ruling market price is less than the average cost for a particular firm
What profits are made in the short run
Mainly supernormal profits - encourages the entry of new firms into the industry
Supply in the long run - perfect competition
Shifts to the right - firms are attracted in by the supernormal profits
Profit in the long run
Normal profits - output where price (AR) = average cost
What is the shutdown price in a competitive market
When in the SR a firm will produce as long as price per unit > or equal to average variable cost (don’t have to make profit unlike in the long run)
Perfect competition: allocative efficiency?
Both SR and LR
P=MC
Perfect competition: productive efficiency?
LR only
Perfect competition: dynamic efficiency?
As there are homogeneous products there is little scope for innovation
Why are competitive markets good for economic efficiency
- lower prices because of many competing firms
- low barriers to entry - entry of new firms = competition
- lower total profits and profit margins than in monopoly
