perfect competition

Question 1

why do we not characterise firms in real world industries under perfect competition?

Answer 1

• because it is a theoretical model that is very strict in its characteristics, so it is used as a theoretical benchmark to compare against other market structures

Question 2

what are the number & size of firms in perfect competition?

Answer 2

• many, small firms

Question 3

what is the implication of having many, small firms in a perfectly competitive industry?

Answer 3

• each firm via its own actions will have a very small & imperceptible impact on the market as a whole,
• as each firm only produces a small percentage of the total market share

Question 4

what is the nature of the product produced by a perfectly competitive firm?

Answer 4

• the products are homogenous to each other

Question 5

what is the implication of each firm in the perfectly competitive industry selling a homogenous product?

Answer 5

• that the goods produced by different firms within the same perfectly competitive industry are considered perfect substitutes!!

Question 6

what is the degree of market knowledge on the part of the consumer?

Answer 6

• consumers have perfect knowledge on the price of the good sold by other firms,
• the quality of the good sold by other firms,
• & the availability of goods at different shops

Question 7

what is the degree of market knowledge on the part of the producer?

Answer 7

• producers have perfect knowledge of the price of the good sold by other sellers,
• the methods of production used by other producers,
• & the cost of inputs faced by other producers

Question 8

what is the implication of producers having perfect market knowledge in a perfectly competitive industry?

Answer 8

• no firm will have a cost advantage over other firms
• the cost curve of every firm must be identical, so the MC & AC curve of all firms MUST be the same

Question 9

what are the barriers to entry & exit for a perfectly competitive industry in the short run?

Answer 9

• in the short run, there are significant entry & exit barriers [UNSPOKEN]

Question 10

what are the barriers to entry & exit for a perfectly competitive industry in the long run?

Answer 10

• there are no entry & exit barriers into the industry in the LR

Question 11

what is the pricing behaviour of firms in a perfectly competitive industry?

Answer 11

• all PC firms are price takers!!

Question 12

what does PC firms being price takers mean?

Answer 12

• it means that the price of the good is determined at the industry level,
• & that individual firms cannot charge a price different from the market equilibrium price

Question 13

do PC firms engage in price competition?

Answer 13

• YES, price taking behavior of PC firms is the result of very intensive price competition!!

Question 14

do PC firms engage in non-price competition?

Answer 14

• PC firms do not engage in non-price competition at all!!

Question 15

what characteristics lead to PC firms not engaging in non-price competition?

Answer 15

• the nature of product (C2)
• the degree of market knowledge (C3(a))