3.4.2

Question 1

What is perfect competition?

Answer 1

A market structure whose assumptions are strong and therefore unlikely to exist in the vast majority of real-world markets

Question 2

What are assumptions of a perfectly competitive market?

Answer 2

-Homogeneous products
-All firms have access to same quality factors of production
-Buyers and sellers act independently
-No barriers to entry or exit
-Perfect knowledge
-profit maximisation for firms
-Utility maximisation for consumers

Question 3

Where do price takers operate?

Answer 3

Highly competitve markets

Question 4

How do firms make losses in the short run in perfect competition?

Answer 4

If the ruling market price is less than the average cost for a particular firm

Question 5

Why are competitive markets good for economic efficiency?

Answer 5

-Lower prices due to many firms competing
-Low barriers to entry
-Lower total profits and profit margins than in a monopoly
-Greater entrepreneurial activity
-Productive efficiency
-Faster rate of technological diffusion