Perfect Competition

Question 1

4 Conditions of Perfect Competition

Answer 1

Many buyers and sellers

Freedom of entry and exit to the market

Perfect Information

Homogenous Goods

Question 2

Long Run Equilibrium 2

Answer 2

If firms are making supernormal profit, new firms are attracted into the market. This increases supply until price falls and all firms now make normal profit If firms are producing and Price is lower than ATC, firms will leave the market, decreasing supply until price increases

Question 3

Efficiency of Perfect Competition in the Long Run 3

Answer 3

All firms are productively efficient, since they produce at minimum average cost.

All firms are allocatively efficient, since price = marginal cost. Therefore perfect competition is statically efficient.

However, it is not dynamically efficient, as no firm has enough for R&D. If they did it would give them little benefit as there is perfect information so other firms would use it as well

Question 4

Revenue & Costs for a Firm

Answer 4

Question 5

Short Run & Long Run Shutdown Point

Answer 5

Long Run: AR < AC

Short Run: AR < AVC

Always draw AR dissecting the Shutdown Point. AR has to be on the diagram