Perfect competition (T.O.T.F) Flashcards
What are the 4 conditions for perfect competition
- many small firms which have no influence over price and quantity
- No barriers to entry or exit
- There is a homogenous product
- Consumers have perfect knowledge
What are exit costs
Money that cant be recovered if the business shuts down
Give 2 examples of exit costs
Advertising
Staff training
What is another name for exit costs
Sunk costs
Firms in perfect competition are PRICE TAKERS. What price do they take?
Market price
In the perfect competition diagram, why is AR=MR
AR is perfectly elastic because the firm is insignificant to the market, it can sell as much as it likes without affecting the market price
Where do firms in perfect competition profit max?
Where MC=MR
What type of profit do firms in Perfect competition make in the long run
Normal profit
What type of efficiency do firms in P.C display
Static efficiency (Productively and Allocatively efficient)
At what point are firms in P.C allocatively efficient
Where MC = AR
What type of profit can firms in P.C make in the short run
Supernormal profit
What occurs when a firm in P.C makes supernormal profit in the short run
Gives the incentive for other firms to join the market
What happens to firms’ profit when new firms join a market (shift from short run to long run)
Supply increases which causes a new equilibrium point
Leads to a new price
Firms are price takers so the AR=MR curve moves to the new price
Leading to normal profit
What is consumer surplus
The total benefit to consumers of paying a price lower than they would have been prepared to pay
What is producer surplus
The extra benefit to those producers who would have been prepared to supply at a price lower than the equilibrium
