perfect competition

• What is a defining characteristic of a perfectly competitive market structure?

  Infinite buyers and sellers
• In a perfectly competitive market, firms sell homogeneous goods and services.
• Firms in perfect competition have the ability to set their own prices.

  False
• Why are firms in perfect competition called price takers?

  They take the market price
• Firms in perfect competition cannot raise their price above the market price without losing all demand.
• There are no barriers to entry or exit in a perfectly competitive market.
• What does perfect information mean for consumers in perfect competition?

  Knowledge of prices and quality
• Firms in perfect competition aim to maximize profits by producing where marginal cost equals marginal revenue.
• In the long run, firms in perfect competition make normal profit.
• What defines the long-run equilibrium in perfect competition?

  Normal profit
• Supernormal profit in perfect competition is a long-run equilibrium.

  False
• In perfect competition, supernormal profit attracts new firms into the market because there are no barriers to entry.
• Why does supernormal profit disappear in the long run in perfect competition?

  Entry of new firms
• Steps in the process of long-run adjustment in perfect competition

  1️⃣ Firms enter the market due to supernormal profit

  2️⃣ Supply shifts to the right

  3️⃣ The market price falls

  4️⃣ Supernormal profit decreases

  5️⃣ Normal profit is achieved
• Subnormal profit in perfect competition leads to firms exiting the market.
• What happens to the market price when firms exit due to subnormal profit?

  Increases
• Subnormal profit in the short run in perfect competition is eliminated in the long run because firms are incentivized to leave the market.
• At what point does the market reach long-run equilibrium in perfect competition after subnormal profit?

  Normal profit
• Match the efficiency type with its condition in perfect competition:

  Allocative efficiency ↔️ Price equals marginal cost

  Productive efficiency ↔️ Lowest point on average cost

  X efficiency ↔️ Operating on average cost
• What does allocative efficiency mean in perfect competition?

  Resources meet consumer demand
• Productive efficiency in perfect competition occurs when firms operate at the lowest point on their average cost curve.
• X efficiency in perfect competition means minimizing waste and costs.
• Why is there no dynamic efficiency in the long run in perfect competition?

  No supernormal profit
• The lack of supernormal profit in the long run in perfect competition prevents firms from investing in innovation.