Market structures Flashcards
Characteristics of perfect competition
- many buyers and sellers
- homogenous goods
- price takers
- no barriers to entry/exit
- perfect information
- profit maximisers
When does perfect competition make normal profit?
Long run
When does perfect competition make supernormal profit?
Short run
Why does perfect competition make SNP in SR?
low barrier to entry/exit and perfect market conditions.
Why do perfect competition subnormal profits only last in the SR?
Firms will be incentivised to leave the market and produce their opportunity cost instead.
Is perfect competition static efficient?
Yes
Is perfect competition allocatively efficient? Why?
Yes as consumers are benefitting from resources following their demand.
Is perfect competition productively efficient? Why?
Yes as they fully exploit any economies of scale in the market.
Are perfect competition markets x-efficient? why?
Yes as they minimise waste and costs.
Why do perfect competitive markets have to be static efficient?
the nature of the competition (intense)- if they deviate away from these efficiencies then they wont survive in the market.
When do firms shutdown in perfectly competitive markets?
AR (P) = AVC
When do firms in perfectly competitive markets breakeven?
AR (P) = AC
When will firms in perfect competition remain open?
AR > AVC
Is perfect competition dynamically efficient? Why?
No as it makes NP in LR.
Firms have no profit to reinvest back into the company.
Criticism of perfect competition model
- information asymmetries- perfect knowledge rarely the reality, can lead to potential inefficiencies.
- externalities- unaccounted costs/benefit can distort production + resource allocation, undermining efficiency claims.
- dynamic considerations- real markets are dynamic
