PC

• What is a characteristic of perfect competition regarding the number of buyers and sellers?

  Many buyers and sellers
• In a perfectly competitive market, what role do sellers play in pricing?

  Sellers are price takers
• What is the entry condition for firms in a perfectly competitive market?

  Free entry to and exit from the market
• 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 is the profit maximization behavior of firms in the short run in perfect competition?

  Firms are short run profit maximisers
• What is the mobility of factors of production 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 lower in a competitive market compared to a market with few large firms?

  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 in the market?

  Increases supply and lowers average price
• What type of profits do firms make in the long run in a perfectly competitive market?

  Only normal profits are made
• What does the diagram of short run equilibrium for a perfectly competitive market show?

  Firms produce at output Q1 and earn supernormal profits
• What happens to the supply curve when new firms enter the market?

  It shifts from S to S1
• What is the new equilibrium price in the long run for a perfectly competitive market?

  P=MC
• What are the advantages of a perfectly competitive market?

  • Lower price in the long run
  • P = MC, ensuring allocative efficiency
  • Productive efficiency at the bottom of the AC curve
  • Short run supernormal profits may increase dynamic efficiency
• What are the disadvantages of a perfectly competitive market?

  • Limited dynamic efficiency in the long run
  • Few or no economies of scale due to small firms
  • Assumptions rarely apply in real life
  • Presence of branding and product differentiation
• How does the presence of supernormal profits in the short run affect market dynamics?

  It incentivizes new firms to enter the industry
• What is the relationship between competitive pressure and equilibrium in the long run?

  Competitive pressure ensures equilibrium is established