Evaluation of Perfect Competition

Question 1

5 Advantages of Perfect Competition

Answer 1

1. Achievement of productive efficiency (in the long run) means that there is no resource waste in production
2. Achievement of allocative efficiency means there is no resource waste on account of producing goods not wanted/value by society
3. Competition leads firms to lower their costs of production and higher-cost firms are forced out of the market
4. Consumers benefit from low prices arising from competition and lack of abnormal profits in the long run
5. Market responds to consumer tastes
   - If firms are earning super normal profit, consumers want more, and supply increases with influx of firms
   - If firms are earning losses, consumers want loss, and supply decreases with efflux of firms

Question 2

5 Disadvantages of Perfect Competition

Answer 2

1. Unrealistic assumptions
2. Limited possibilities to take advantage of economies of scale
3. Lack of product variety
4. Waste of resources in the process of long-run adjustment (unrealistic assumption that there are no costs of adjustment)
5. Limited ability to engage in R&D due to lack of super-normal profit
6. Model cannot guarantee that there will not be any externalities of production or consumption, in which case allocative efficiency will no longer be achieved