Perfect Competition Flashcards
Perfect competition
A perfectly competitive market has:
Many small buyers and sellers
No barriers to entry or exit
Homogeneous products
Perfect information
As demand becomes more elastic, consumers will:
respond more to changes in price.
Mandy’s demand is perfectly elastic, so if Mandy puts her price up, even just a little bit to £3.10…her demand will:
Perfectly elastic demand means consumers are ultra-mega-super-responsive to price changes! If Many puts her price up even just a bit, her consumers will stop buying from her completely because they’re so sensitive to price changes. They’ll immediately switch to another seller in the market.
Explain how a perfectly competitive market moves to its long run equilibrium. (4 marks)
In the long run, perfect information means potential sellers outside the market will see the opportunity to make supernormal profit by entering the market.
There are no barriers to entry, so new firms will enter the market, increasing supply and decreasing price until AR touches the bottom of the firm’s AC and all the supernormal profit is gone.
New firms will no longer enter the market because they can no longer make supernormal profit, so we have reached the long run equilibrium.
Explain how a perfectly competitive market, where firms are making a short run loss, moves to its long run equilibrium. (4 marks)
If firms are making a short run loss, they will leave the market and this is easy to do because there is no barriers to exit.
As firms leave the market, supply decrease and prices will increase back up, until normal profit can be made.
At this point, firms will be covering their opportunity cost - so they’ll no reason to leave the market anymore. Which means we’ve reached our long run equilibrium - where firms are making normal profit!
But in the long run, perfectly competitive firms will make:
normal profit
