Perfect Competition

Question 1

Assumptions

Answer 1

Many buyers and sellers (due to diseconomies of scale)
Homogeneous products (no brand loyalty)
No barriers to entry or exit (supernormal profits competed away)
Perfect competition (consumers know where good is on offer at the cheapest price)
No externalities

Question 2

Price taking

Answer 2

Each firm will sell at the market equilibrium price

Question 3

Perfectly elastic demand curve

Answer 3

AR=MR at the equilibrium price (due to price taking)

Question 4

Properties of long-run equilibrium

Answer 4

The firm is profit maximising at MC=MR, all economies of scale exploited -> making normal profits

Question 5

Efficiency in the long-run

Answer 5

Each firm is operating at the minimum of ATC (technically efficient)
Price = MC <-> allocative efficiency

Question 6

Examples

Answer 6

Commodity markets, market for currencies

Question 7

Criticisms of the model

Answer 7

Hayek- if there was perfect information there would be no need for competition -> misleading of true merits of market mechanism
One of first things small firms do is m to differentiate their products from others (problems with assumption of product homogeneity)