Unit 8 Flashcards
1
Q
Markets in perfect competition general characteristics:
A
- both buyers and sellers are price takers
- Competition in this case eliminates any bargaining power, so equilibrium is competitive equilibrium, also a Nash equilibrium in this case.
- Equilibrium at D = S, Pareto efficient point as well as no DWL
2
Q
Pareto efficiency in perfect comp markets depends on 3 assumptions:
A
- price taking consumers and sellers, so MC = P MR = D
- Complete contract, exchange is governed by legal and refund system
- No external effects on anyone else but buyer and seller
3
Q
PED in perfect comp
A
Perfectly elastic as any other price would lead to consumers switching to cheaper competitors.
4
Q
Why is output at MC = P*
A
- If MC > P, the last unit would cost more than p to make, so firm would make a loss on this unit and could make higher profits by reducing output.
- If MC < P*, could produce more units, so could make higher profits by raising output
- demand curve = MR curve as for each extra good sold, marginal/ added revenue is p*, so demand curve = MR.
5
Q
P n Q
A
- profit maximises
- price taker
6
Q
P n MC
A
- MC< P
- MC = P
7
Q
DWL
A
- yes
- no
8
Q
Economic rents
A
- owners receive economic rent
- rent not LT sustainable
9
Q
Advertising
A
- firms advertise unique products
- little advertising
10
Q
RnD
A
- firms invest
- Little incentive for innovation as innovation rents dont last
11
Q
Necessary for perfect competition
A
- many undifferentiated sellers
- sellers must act independently
- many buyers
- buyers know the sellers’ prices
12
Q
MC cuts Isoprofit curve at
A
Each isoprofits lowest point
13
Q
Firms have no price setting power
A
So one price for the market P*
14
Q
2 OUTPUT POINTS
A
Where MC = MR (P)
OR
Where P = tangent to isoprofit curve
15
Q
Market supply curve is just
A
The sum of all the firms’ supply curves
