1.5.3 Perfect competition Flashcards
perfectly competetive market definition
lots of small businesses selling identical products e.g. small farmer selling grain - identical, no differences.
Assumptions
- firm = small
- products = homogeneous
(Above 2 make firm PRICE TAKER) - easy for firms to enter and exit market.
- firms and consumers have perfect knowledge.
- firms maximise profits
In this market price is determined by…
the interaction of demand and supply.
Competition and Profits
In a competitive market, profits tend to be lower compared to markets dominated by a few large firms.
Market Share and Power
Each firm in a competitive market holds a minimal market share, resulting in limited market power for each entity.
Entry barriers are…
LOW
especially when existing firms exhibit profit-making trends.
Impact on Supply and Price
New entrants increase market supply, leading to a decrease in the average price of goods/services.
Competition’s Effect on Profits
As prices decrease due to increased supply, existing firms experience a competitive erosion of their profits as they engage in price competition.
Profits
Short run
supernormal profits
Profits
Long run
where profits
are competed away, only normal profits are made.
Case for
- In LR, there’s a lower price. Produces where S=D - allocative efficiency.
- Firms produce at the bottom of
the AC curve = productive
efficiency. - Each firm accepts markey price - competative price =.consumers not exploited.
Case against
- Lack of economies of scale.
- Small profits don’t have profit to do R&D, and dev. projects.
- Firms only produce efficiently in LR.
- The assumptions of the model rarely apply in real life. In reality, branding, product differentiation, adverts and positive and negative externalities, mean that competition is imperfect.
price determination + diagram
production + diagram
- A(additional)R = MR
- additional cost = marginal cost
- profit max output = MC = MR
profit formula
= TR - TC
TR = P x Q
TC = AC x Q
