Perfect Competition

Question 1

What are characteristics of perfect comp?

Answer 1

-many buyers and sellers
-homogenous goods (price takers)
-no barriers to entry/exit
-perfect information
-firms are profit maximisers where MC=MR

Question 2

What will not last in the long run?

Answer 2

Subnormal profit and supernormal profit

Question 3

Why would supernormal profit not last in the LR?

Answer 3

SNP will attract firms and they can enter due to no barriers and perfect information.
This will cause supply to shift right reducing price. Will continue until theres no incentive to join the market.
Returns back to normal profit.

Question 4

Why would subnormal profit not last in the LR?

Answer 4

Firms will be incentivised to leave and produce their oppurtunity cost. They can do this due to no barriers.
This will cause supply to shift to the left and price is driven up until theres no incentive to leave.
Returns back to normal profit.

Question 5

What are the conclusions for LR Equilibrium normal profit?

Answer 5

Theres allocative efficiency since P=MC. So resources are perfectly following consumer demand.

Theres productive efficiency since firms are operating at the lowest point on the AC.

Theres x-efficiency since firms are producing on the AC with no wasteage.

Theres no dynamic efficiency since theres no SNP in the LR.