Week 4 Flashcards
what is the range of most competitive to least competitive market structure (4 of them)
- perfect competition
- monopolistic competition
- oligopoly
- monopoly
the number of firms in the 4 different market structure
- perfect competition, infinitely many
- monopolistic competition, lots
- oligopoly, few
- monopoly, one
what are the 4 assumptions of perfect competition
- many buyers and sellers
- perfect information
- homogenous product (selling the same products)
- no barriers to entry and exit
does any action from a single buyer or seller affect the market in a perfect competition market structure ( 4 assumptions of perfect competition)
- infinitely many buyers and sellers, so any action is too small to affect the market
how does perfect information lead to lots of price competition in a perfect competition market structure (4 assumptions of perfect competition)
- buyers and sellers know the market price
- therefore if a firm raises the price above market prices, the firm will lose all their customers
how does homogenous product lead to no non-price competition (4 assumptions of perfect competition)
all firms produce the exactly same product
- therefore buyers will choose where to buy based solely on price
how does no barriers to entry or exit control supply (4 assumptions of perfect competition)
- when there are super normal profits firms enter
- when firms are making a loss, some will leave the market
- therefore entry and exit controls supply by costing nothing to leave or enter
in perfect competition are firms price takers, true or false
true
- because PED is perfectly elastic, it doesn’t make sense to charge more than market price lose all your customers,
- less than market price you would market more profit selling at market price
What is the PED in a perfect competition market structure
Perfectly elastic
how are profits effected for firms in the long-run in a perfect competition market structure
firms make only normal profits in the long-run
- supernormal profits
–> incentivises firms to enter the market
—> increasing market supply
—–> decreasing market price
——–> reducing profits
and repeat
how are profits effect for firms in the short-run in a perfect competition market structure
in the short-run firms can make an economic loss
-> economic loss (profit below normal profit)
–> in the long-run firms leave the market
—> reducing market supply
—-> increasing market price
—–> increasing profits
still leads to normal profits made in the long-run
why is the MR=AR=D curve horizontal in a perfectly competitive market
- derived from the market equilibrium price
how can firms profit maximise on a graph
where MR = MC
where is productive efficiency on a graph
productive efficiency is achieved by producing at the bottom of the AC curve
productive efficiency definition
producing at the lowest possible average costs (AC)
are perfectly competitive firms productively efficient in the long run
Yes, they produce at the bottom of the AC curve at a point where MR = MC = AC
allocation efficiency definition
occurs where there is an optimal allocation of resources
where does allocative efficiency occur on a graph
occurs where P = MC
are perfectly competitive firms allocatively efficient in the long run
yes, P = MC at the point they price and output
even though perfect competition is a theoretical concept why is it useful to use / compare
the closer an industry is to perfect competition, the closer it is to the efficiency results
in real competitive markets, competition encourages firms to be better
- reduce prices
- encourages firms to reduce costs
- improve service
- improve product
when is perfect competition not allocatively efficient
when there are externalities present, private costs and benefits do not equate to social costs and benefits
MSB doesn’t equal MSC
How does perfect competition not encourage innovation and invention
-> R&D promotes innovation and invention
–> which drives long-reun economic growth
—> firms make only normal profits
—-> little money for R&D
—–> perfect comp may not encourage innovation and invention
——-> may not drive long-run growth
