Perfect competition

Question 1

What are the characteristics of a perfect competition?

Answer 1

Homogenous products
All firms have access to the same quality factors of production
Large number of buyers and sellers
Free entry into and exit from market
Low barriers to entry
Perfect knowledge
Profit maximisation is assumed as key objective
Price makers

Question 2

How allocatively efficient is perfect competition?

Answer 2

In both the short and long run, price is equal to marginal costs and thus allocative efficiency is achieved.

Question 3

How productly efficient is perfect competition?

Answer 3

This is attained in the long run for a competitive market. Output is at lowest point of AC. If a firm is producing at the lowest point of their lowest average cost curve.

Question 4

How dynamically efficient is perfect competition?

Answer 4

Not much as very little space for innovation.

Question 5

Why are competitive markets good for economic efficiency?

Answer 5

Lower prices because of many competing firms
Low barriers to entry
Lower total profits and profit margins than monopoly
Competition will ensure that firms move towards productive efficiency

Question 6

What are some evaluation points for perfect competition?

Answer 6

Dominance in real world markets
Always information gaps facing consumers
Rare for entry and exit in an industry to be costless

Question 7

What are some pros for perfect competition?

Answer 7

Consumers are not exploited by firms
Equality as product is same from every firm
No wasted costs in terms of advertising

Question 8

What are some cons for perfect comeptition?

Answer 8

Consumers lack choice
Firms are unlikely to grow as they cant benefit from EOS