PERFECT COMPETITION

Question 1

CHARACTERISTICS OF PERFECT COMPETITION

Answer 1

~Infinite number of suppliers and consumers
~No supplier has marker power
~Each firm is a price taker
~Perfect information- both the supplier and the consumer have perfect knowledge of the market.
~Products are identical (homogenous)
~No barriers to entry or exit
~Firms are profit maximisers- all firms will choose to produce at MC=MR

Question 2

MORE INFORMATION ABOUT PERFECT COMPETITION

Answer 2

~No firm will make supernormal profit in the long run.
~Perfect competition usually leads to allocative efficiency
~Ensures the rationing, signalling incentive of the price mechanisms work perfectly.
~Demand curve=Marginal Utility
~Supply curve=Marginal Costs

Question 3

WHAT EFFICIENCIES ARE FIRMS USUALLY IN PERFECT COMPETITION?

Answer 3

~Productive efficiency
~Static efficiency
~Allocative efficiency

Question 4

PROFIT MAXIMISATION IN THE LONG RUN AND SHORT RUN.

Answer 4

➳No firm can make SNP in the long run.
➳Short run SNP attracts other firms to join the market as there are no barriers to entry meaning SNP is competed away.