term 2 lecture 4 - perfect competition Flashcards
what is a market?
a system of buying and selling. two conditions must always be satisfied:
all trades must be voluntary and prices must be agreed by both sides to effect the trade
what is market clearing?
when the demand is equal to the supply. the point at which is cleared is equilibrium
what is the market type where sellers market power is zero
perfect competition
what is the market type where sellers have limited selling power?
oligopoly
what is the market type for which sellers has a strong amount of market power but multiple firms?
monopolistic competition
what is the market type for which the seller has complete market power?
monopoly
when buyers have the price setting power, what is the market type?
a monopsony
what are the markets for whcih both sides have market power?
bilateral monopoly, bargaining, oligopsony
what are the structural characteristics of perfect competition?
many suppliers/ firms and many buyers
identicial product ( no branding or brand loyalty
all information is known to everybody
in the short run, what are the characteristics of the firm in perfect competition?
fixed costs whcih are also sunk costs
in the short run what are the characteristics of the industry in perfect competition?
no new entry but shutdown can happen (no of operative frims can fall but cant increase
both entry and exit barriers exist. exit is costly
in the long run, what are the characteristics of the firm in the perfect competition?
all costs are variable and there are no sunk costs
in the long run, what are the characteristics of the industry in perfect competition?
there are no entry and exit barriers. any firms can come in and anyone can leave costlessly
what are the individual firms supply desicion?
it has two decisions:
to produce or not to produce
if yes then how much to produce
when the price is equal to the marginal cost, what is occurring to the marginal cost?
it must be increasing when the price is equal to marginal cost
how does a firm decide whether it wants to produce or not to produce?
if the price is greater or equal to the average costs then the profit is positive so the firms should produce. if the producer surplus is positive, then the firm will choose to stay open in the short run. in long run, price must be at least equal to average costs
what is the formula for producer surplus?
revenue minus the variable cost
what is the shut down price in the short run?
the shut down price is price is equal to average variable cost in the short run. this is because if you shut down then the loss will be equal to the fixed cost, however if price is greater than variable cost, then the loss will be less than fixed cost so you should stay open. if the price is less than average variable cost though you should shut down as loss will be greater than fixed cost
what is the effect of decreasing returns to scale?
decreasing returns makes firms small akin to capacity constraints which then allows price taking to be a consistent behaviour
what does the price taking behaviour of the firm imply about the price?
the price taking behaviour of the firm implies that it must follow p=MC rule to decide how much it should supply. this means that its supply curve is always upwardward sloping regardless of short or long run
for the industry, is the supply curve upward sloping?
the supply curve is upward sloping for the industry only in the short run
what does welfare analysis relate to?
it relates to individual gains and losses and the overall social benefits and costs
why do we call perfect competititon the ideal form of market?
because production is carried up to a point where the consumers marginal willingness to pay is equal to the societies marginal cost of production so there is no deadweight loss. social welfare is equal to the sum of consumer and producer surplus
what is allocative efficiency in welfare terms?
marginal social benefit is equal to the marginal social cost
