perfect competition

• What is a characteristic of perfect competition?

  Many buyers and sellers
• In a perfectly competitive market, what are sellers considered?

  Sellers are price takers
• What allows free entry and exit in a perfectly competitive market?

  Low barriers to entry
• What type of knowledge do participants have in a perfectly competitive market?

  Perfect knowledge
• What type of goods are produced in a perfectly competitive market?

  Homogeneous goods
• What do firms aim for in the short run in a perfectly competitive market?

  Firms are short run profit maximisers
• How are factors of production characterized in a perfectly competitive market?

  Factors of production are perfectly mobile
• How is price determined in a perfectly competitive market?

  By the interaction of demand and supply
• Why are profits likely to be lower in a competitive market?

  Each firm has a very small market share
• What happens when firms in a competitive market make a profit?

  New firms will enter the market
• What effect does the entry of new firms have on supply and price?

  Increases supply and lowers price
• What type of profits do firms make in the long run of perfect competition?

  Only normal profits are made
• What does the yellow shaded rectangle in the short run diagram represent?

  Area of supernormal profits
• What is the result of increased supply in the market?

  Price level in the market falls
• What are the advantages and disadvantages of a perfectly competitive market?

  Advantages:

  • Lower price in the long run (P=MC)
  • Allocative efficiency in the long run
  • Productive efficiency (producing at bottom of AC curve)
  • Short run supernormal profits may increase dynamic efficiency

  
  

  Disadvantages:

  • Limited dynamic efficiency due to lack of supernormal profits
  • Few or no economies of scale due to small firms
  • Assumptions rarely apply in real life (branding, differentiation, externalities)
• What is allocative efficiency in a perfectly competitive market?

  Price equals marginal cost (P=MC)
• What limits dynamic efficiency in the long run of perfect competition?

  Lack of supernormal profits
• Why might firms in perfect competition have few economies of scale?

  Firms are small
• What real-life factors mean that competition is often imperfect?

  Branding, product differentiation, externalities
• How does the assumption of perfect competition differ from real-life markets?

  Assumptions rarely apply in real life
• What are the participants in a market called?

  Buyers and sellers
• What type of goods are described as homogenous goods?

  Goods that are identical in nature
• What does "no barriers to enter or exit" imply in a market?

  Firms can freely enter or leave the market
• What does perfect information in a market mean?

  All participants have complete knowledge of conditions
• What do firms aim to maximize in a competitive market?

  Supernormal profits
• What is the significance of price in a perfectly competitive market?

  Price is determined by market forces
• What happens to firms in the long run in a perfectly competitive market?

  They earn normal profits
• What are the characteristics of perfect competition?

  • Many buyers and sellers
  • Homogenous goods
  • No barriers to entry or exit
  • Perfect information
  • Firms maximize profits
• How does a firm determine its price in a perfectly competitive market?

  By being a price taker
• What is the relationship between marginal cost and average cost in a competitive market?

  Firms minimize waste and cost
• What is dynamic efficiency in production?

  Improvement through innovation and technology
• What is the outcome for firms that do not innovate in a competitive market?

  They will not survive
• What is the role of opportunity cost in market decisions?

  It influences resource allocation
• What is the expected behavior of firms in the long run?

  They will earn normal profits
• What are the implications of barriers to entry in a market?

  • Limits competition
  • Protects existing firms
  • Can lead to higher prices
  • Reduces consumer choice
• What is the significance of economies of scale in production?

  It reduces average costs as output increases
• What is the definition of allocative efficiency?

  Resources are allocated to maximize consumer satisfaction
• What does it mean for a firm to be a price taker?

  It accepts the market price as given
• How does the concept of supernormal profit relate to market entry?

  It attracts new firms to the market
• What is the impact of perfect competition on consumer prices?

  Prices tend to be lower