perfect competition

Created by

Tanisha Memmi :]

Cards (8)

perfect competition assumptions
many buyers and sellers acting independently (no collusion)
perfect information for buyers and sellers - helped by next assumption
homogenous products - perfect substitutes
no barriers to entry or exit
all firms have equal access to factors of production
firms are profit maximisers + consumers are utility maximisers
perfectly elastic demand curve, firms are price takers
no externalities
no information failure
no other type of market failure
supported by a competitive labour market
revenues, costs and profits for a competitive firm- perfect competition
if most firms are making supernormal profits in the SR, encourages entry of new firms into the market, driven by profit motive
will be an outward shift in supply + fall in market price
increase in market supply will reduce ruling market price to where the P=LRAC
at this point, all firms in the industry are making normal profits where P/AR=AC
there is no further incentive for movement of firms in and out of the industry, ceteris paribus, + a long-run equilibrium is established where P=AC at an output where MR=MC
revenues, costs and profits for competitive firm if firm is making a loss - perfect competition
in the long run a firm will leave the market if they are not earning normal profit
firms will stay in operation as long as it is covering its variable costs and ideally contributing towards its fixed costs, in long run it needs to cover all its costs
supply shifts to the left, price rises, AR and MR will eventually rise
perfect competition assumption - realistic + unrealistic
most firms have some amount of price-setting power, price makers not takers
dominance in real world markets of differentiated/branded products
highly complex products, always information gaps facing consumers
impossible to avoid search costs even with the spread of digital/web technology
patents, control of intellectual property, control of key inputs are all ignored by the competitive model
rare for entry and exit to be costless
economic efficiency and perfect competition - allocative efficiency
in both long and short run, P=MC so allocative efficiency is achieved when no one can be made better off without making some other agent worse off - achieve a pareto optimum allocation of resources
economic efficiency and perfect competition - productive efficiency
occurs when the equilibrium output is supplied at minimum AC
attained in LR for competitive market
economic efficiency and perfect competition - dynamic efficiency
little scope for innovation
designed purely to make products differentiated from each other
assumption of perfect competition
many buyers and sellers
perfect information
homogenous products
no barriers to entry/exit