Chapter 3 Competitive Markets and Perfect Competition Flashcards Preview

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Flashcards in Chapter 3 Competitive Markets and Perfect Competition Deck (11)
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What are the five assumptions of perfect competition?

Price taker
Homogenous products
Freedom of entry and exit
Large number of buyers and sellers
Perfect knowledge

1

Define price taker

A firm has to accept the price ruling in the market

2

Homogenous

All products are the same irrespective of who makes them

3

Freedom of entry and exit

Any firm can enter the industry as there are no barriers to entry to keep them out

4

Large number of buyers and sellers

This is to ensure that the product is sold and the firm is a price taker

5

Readily available information

We assume that all firms have equal access to any technological improvements and that all firms have equal advantages. Thus firms are unlikely to engage in research and development as the results will be available to other firms

6

Why is p=AR=MR=D

The firm is thus faces a perfectly elastic d curve. P is unaffected by variations in output and so the MR resulting from an increase in sales by one output is constant and equal to price

7

Define allocative efficiency

The optimum allocation of scarce resources that best accords with consumers pattern of demand. Where P=MC.

8

Optimum output

The optimum combination of fixed and variable factors that minimise AC

9

Static efficiency

Efficiency at a point in time - includes allocative and productive efficiency

10

Dynamic efficiency

Efficiency over time and concerns the production of new products, new techniques and new processes,and for firms to undertake investment in R+D they need to make supernormal profits.