Perfectly competitive Flashcards
Characteristics of PC firms (BTE Type of product Number of firms Degree of knowledge)
No barriers to entry
Homogenous product
Very large number of small firms
Perfect knowledge
Profits in the short run
Supernormal, AR > AVC (TC > TVC)
Normal, AR = AVC (TC = TVC)
Subnormal, AR < AVC (TC < TVC)
Profits in the long run
Normal
(long run) Earning supernormal profits to normal profits
Supernormal profits → encourage new firms to enter → market SS increases, market equilibrium price decreases → market price keeps falling until supernormal profits are competed away
Price and AR of firm fall
(long run) Earning subnormal profits to normal profits
Subnormal profits → firms leave → market SS decreases, market equilibrium price increases → market price keeps increasing until existing firms make normal profits
What do PC firms do when they earn subnormal profits in the long run
- Reviewing production methods to reduce cost
- Rationalization (actions to make a company, process, or industry more efficient, especially by dispensing with unnecessary personnel or equipment
Lack of ability to engage in price competition
no BTE → unable to accumulate continuous supernormal profits → price competition strategies cannot be used as firm don’t have past accumulated profits to cover any potential loss
Lack of incentive to engage in price competition
Firms can already sell as much as it wishes to at the prevailing market price → choose to be price takers
Lack of ability to engage in non-price competition
no BTE → unable to accumulate continuous supernormal profits → inability to engage in non-price competition, e.g. product differentiation, advertising
Lack of incentive to engage in non-price competition
Perfect knowledge, no way to restrict info → all PC firms sell homogenous good eventually → no incentive to engage
Why are MC firms productive efficient (firms’ POV)?
likely to produce at a point on the LRAC
Why are MC firms productive efficient (society’s POV)?
produce on min point of LRAC when maximising profits
Why are MC firms allocative efficient?
Produces at output where MC = MR where AE is achieved when maximising profit
Why are MC firms dynamic inefficienct?
No incentive to innovate
Inability to innovate
Why are MC firms favourable in terms of EQUITY?
Doesn’t worsen inequity between consumer and producer
