Perfect Competition Flashcards
Rank the 4 types of competition in terms of competitiveness (1 = most competitive).
1) Perfect competition.
2) Monopolistic competition.
3) Oligopoly.
4) Monopoly.
What is perfect competition, and what are its 5 characteristics?
A hypothetical market structure, where no firm can make supernormal profits in the long-run. Perfect competition has 5 characteristics:
1) many buyers/sellers.
2) Perfect information
3) Homogenous products.
4) No barriers to entry/exit.
5) Firms are profit maximisers.
What are the 5 characteristics of perfect competition?
1) Many buyers and sellers: Firms are price takers and cannot influence market price.
2) Perfect information: Both buyers and sellers possess perfect knowledge of products/prices.
3) Homogenous products: All firms produce identical products, with no branding or differentiation of the products.
4) Freedom of entry/exit: Firms can enter and exit the industry with ease, as there are no barriers to entry/exit.
5) Profit maximisation: All firms are assumed to be profit maximisers, where MC = MR.
Why, in perfect competition, can firms only make supernormal profit in the short-run?
If firms are making supernormal profits in the short-run, new firms are incentivised to join the market. This is possible due to the freedom of entry/exit in perfect competition. This will lead to an increase in market supply in the long-run, reducing price to equilibrium.
What are losses like in perfect competition (short and long run)?
If firms are making a loss in the short-run, some firms will leave the market, due to the freedom of entry and exit. This will increase the supply, which in the long-run, will restore price to equilibrium.
What is the PED of a perfectly competitive firm?
Perfectly elastic - the demand curve is a horizontal line.
What is the PED of a perfectly competitive industry?
Unitary - the demand curve is downward-sloping.
