Perfect Competition Flashcards
What is the primary characteristics
High competition
Example of perfect competition
Agriculture or Car wash
What are goods in perfect competition
Perfectly elastic as any change in price causes a huge change in demand
What are Firms in Perfect Competition
Price takers as they have no control over price
What are the four characteristics of Perfect Competition
- Perfect Knowledge
- Many buyers and sellers
- Free entry and exit from the industry
- Homogenous Goods
How is homogenous goods a characteristic of perfect competition
All the goods are identical so any price change has no effect so there are no price changes, no firm has a superior quality good that gets them more market share
How is perfect knowledge a characteristic of perfect competition
All producers have equal knowledge on production techniques and each others costs and prices, consumers also have perfect knowledge about the goods and their price
How is free entry and exit a characteristic of perfect competition
When the market is doing well firms will join as there are no barriers, this means that no firms will make long run supernormal profits, firms making a loss will also be able to leave immediately
How is Many buyers and sellers a characteristic of perfect competition
No firm or customer has any influence over the market as there are so many and they are all the same size
What position do firms in perfect competition hold
profit maximisation MC=MR
Why can supernormal profits never be made in the long run
Supernormal profits attract new firms as there a no barriers to entry so supernormal profits are competed away as firms undercut each other until all firms make normal profit
Which efficiencies does Perfect competition achieve
productive and allocative so static
What do perfect competition firms lack
economies of scale and dynamic efficiency
How can firms in perfect competition making a loss survive in the short run
short run loss minimisation where their selling price AR is above the AVC the cost to make the good as they are reducing their loss
What is the other name for x inefficiency
organisational slack
