Economics - The Firm and Market Structures - Perfect Competition Flashcards
what are the five factors we analyse when examining market structure?
number of sellers barries to entry nature of substitutes nature of competition price power
what are the characteristics of perfect competition? number of sellers barries to entry nature of substitutes nature of competition price power
- many
- very low
- very good
- price only
- none (price taker)
what are the characteristics of monopolistic competition? number of sellers barries to entry nature of substitutes nature of competition price power
- many
- low
- good substitutes but differentiated (white t-shirts, toothpaste)
- price, marketing, features
- some
what are the characteristics of an oligopoly? number of sellers barries to entry nature of substitutes nature of competition price power
- few
- high
- very good substitutes or differentiated
- price, marketing, features
- some to significant
what are the characteristics of a monopoly? number of sellers barries to entry nature of substitutes nature of competition price power
- single
- very high
- no good substitutes
- advertising
- significant
what are barriers to entry indicative of?
whether of not a firm will be able to be economically prosperous in the long run
what are the characteristics of firms in perfect competition?
- price takers
- homogenous product
- large number of independent firms
- perfectly elastic demand curves (for each firm. i.e. price is constant)
- no barriers to entry/exit (can’t sustain LR profit)
- supply and demand determine market price
in a perfectly competitive firm, at what point in the SR will a firm produce until to maximise profit?
until MC=MR
why is the MR curve perfectly flat in perfect competition?
because all additional units are assumed to be sold at the same (market) price
define economic profit?
total revenue less opportunity cost of production
what is the difference between demand curves for the market and individual firms in perfect competition?
market - downward sloping
firm - perfectly horizontal
in perfect competition, above which price will there a market supply?
as long as price is above AVC (the market supply curve is above the AVC)
is there profit made in the LR for perfect competition firms?
no. they sit in equilibirum where P=MR=MC=ATC
- in the LR, new firms enter the industry when profits >0 and will exit the industry when profits <0 (this can happen because no barriers to entry/exit)
what happens in perfect competition when there is a SR increase in demand?
the demand curve shifts right causing an increase in price. This means the firms are no longer in equilibrium and economic profits are made.
what happens in perfect competition when there is a permanent increase in demand.
demand curve shifts right and increases price and therefore profit. New firms enter the market and this shifts the supply curve to the right (bringing price back down and to a new equilibrium)
