Perfect Competition

Question 1

what is an industry?

Answer 1

all the firms in the market/place selling the same product or service

e.g. all the fast food outlets, all the book publishers, all hotels,…

industries operate in different market structures

Question 2

name 4 different market structures!

Answer 2

perfect competition,
imperfect competition,
oligopoly,
monopoly,

Question 3

what is perfect competition?

Answer 3

many sellers of an identical product

e.g. strawberry sellers on the side of the road

Question 4

what is imperfect competition?

Answer 4

many sells of similar products

e.g. different restaurants

Question 5

what is an oligopoly ?

Answer 5

very few sellers

e.g. banks in Ireland

Question 6

what is a monopoly ?

Answer 6

sole supplier

e.g. Irish rails

Question 7

what are the assumptions / characteristics of perfect competition ?

Answer 7

there are many buyers in the market,
there are many sellers in the market,
goods are homogenous,
freedom of entry and exit,
perfect knowledge exists,
profit-maximising,
no collusion

Question 8

what is each firm in perfect competition?

Answer 8

a price taker

i.e. it accepts the price as it is set on the market. each firm supplies such a small fraction of the market that it cannot influence the market price

Question 9

implications of the assumptions of perfect competition?

Answer 9

organized commodity markets, 
market in stocks and shares,
market for agricultural produce,
vast market in global currencies,
fruit and veg. ventures in local markets

Question 10

why don’t firms in perfect competition engage in advertising ?

Answer 10

homogenous goods,
increased cost and no additional revenue,
benefits the entire industry,
perfectly elastic demand

Question 11

what is supernormal profit?

Answer 11

defined as profit in excess of normal profit

Question 12

perfect competition in the short run

Answer 12

SNP may be earned,
Price P is at Quantity Q
Equilibrium where MC = MR
Cost is at point C (SNP),  AVC covered
Scarce Resources are not used efficiently

Question 13

perfect competition in the long run

Answer 13

SNP is not earned
Price p at Quantity q
Equilibrium is at MC = MR
Cost at pint C (NP)
Scarce Resources are used efficiently as production occurs on the lowest point of AC

Question 14

what part of the MC curve is the short run supply curve of a firm in perfect competition?

Answer 14

that part that lies above the lowest point of the average variable cost curve

Question 15

what portion of the MC curve is the long run supply curve of perfectly competitive firm?

Answer 15

that portion that lies above the lowest point of its average cost curve

Question 16

how is the MC = P in the long run of perfect competition?

Answer 16

MC = MR
MR = AR (AR is price)
therefore MC = price
this is unique to perfect competition only

Question 17

what are the benefits of perfect competition?

Answer 17

production occurs at the point of lowest cost,
minimum prices,
no advertising,
efficiency is encouraged ,

Question 18

what are the disadvantages of perfect competition?

Answer 18

no scope for economies of scale,
little choice for consumers,
no research and development,
no incentive to develop new technology

Question 19

summary of perfect competition in the short run :

Answer 19

produces where MC = MR
must cover AVC
SNP may be earned as AR is bigger than AC

Question 20

summary of perfect competition in the long run :

Answer 20

produces where MC = MR
must cover all costs
NP is earned as AR = AC
produces where MC = MR = AC = AR