Perfect Competiton Flashcards
What is perfect competition
Perfect competition is an economic model of a market structure with the highest possible level of competition
What are the characteristics of perfect competition
- no barriers to entry
- homogeneous products
- perfect knowledge of market condition
- many participants
- firms are profit maximisers
Explain the perfect competition firms in the short run
- price takers so perfectly elastic demand curve and no price setting power
- profit maximisers so they set output where mc=mr
- this leads them to having supernormal profits
What does this snp lead to
- SNP attracts new firms into the market, they can enter because no barriers to entry and perfect information
- Supply shifts to the right
- Price falls until there is no more incentive to enter the market
- Normal profit is left at the end
What is the long term equilibrium
- normal profit is being made
Are firms in perfect competition allocatively efficient
Firms in perfect competition are allocatively efficient in both the short run and the long run as price is always equal to marginal costs
What does this mean
Being allocatively efficient means resources are following consumer demand meaning consumers are getting what they want in the quantities that they want it. Being allocatively efficient also allows for lower prices and consumer surplus to be maximised which is good for consumer welfare
Are firms in perfect competition productively efficient
- they are only productively efficient in the long run
What does this mean for the firm
This means they are maximising output at the lowest point on the average cost curve which means there is a full exploitation if economies of scale, this allows prices to be kept low
Are they dynamically efficient
- no as all good are homogenous
- do not earn supernormal profit in the long run
Why is a competitive market good for economic efficiency
- competitive markets means that there is a high xed which means prices need to be kept low in order to be profitable. This encourages firms to cut costs and be productively efficient as well as being x efficient and leaving no waste
- competition leads to an increase in innovation and quality which means firms are being more dynamically efficient to gain a competitive edge
What are some flaws of the perfect competition model
- ignores the idea of legal patents and control of property
- a market with no barriers to entry or exit is unrealistic
- highly complex products almost always lead to information gaps
- real firms almost always have some price setting power
