Perfect Competition

Question 1

5 Characteristics of a perfectly competitive Market

Answer 1

1. Many buyers and sellers
   2.Homogeneous goods (price takers)
2. No barriers to entry/exit
3. Perfect Information
4. Firm’s are Profit-Maximisers

Question 2

Explain Homogenous in detail

Answer 2

They sell identical goods and services

therefore, they are price takers with no ability to set their prices

when a new firm enters the market they must charge the price which is being charged by other firms in the market

If they charge higher, they will lose out on all consumer demand

if they charge lower, they will sell at a loss without gaining anything in the process

Question 3

Explain Perfect info in detail

Answer 3

Consumers know about prices and quality in the market

Producers know about technology and costs in the market

Question 4

Graph Explaination

Answer 4

ONE GRAPH BEFORE (Supply and demand)

Get the damn price!

Now to the perfect comp on remember P,C,R (axis: Y)

AR = MR = D

AC touches

MC passes by

C1 and P1 on market price.

Question 5

Can Perfect Competition firms earn Supernormal Profit?

Answer 5

Yes, but ONLY in the short-run

long run they will earn normal profit

Question 6

Why can’t Perfect Competition firms earn Supernormal Profit in the Long Run?

Answer 6

0. They are earning a supernormal profit (short run)
1. Other firms will see the supernormal profit
2. They will be attracted by it
3. No barriers to entry + Perfect Information (they can easily join)
4. When new firms enter supply shifts right and drives prices down
5. Price keeps decreasing until there is no more incentive for new firms to join i.e all supernormal profit is gone

BONUS:

1. Total Production in markets increases
2. Production per firm in the market decreases

Question 7

What 3 of the 4 Efficiencies does this market have?

Answer 7

Static (Allocative,Productive,X-efficiency): YES!

Dynamic: NO! (Market will never progress)

Question 8

Why can we assume X-effiency

Answer 8

Due to many (infinite) buyers and sellers, firms face intense competition.

If they are inefficient, they would get undercut by other firms and loose out all their consumer demand

Question 9

Draw Normal Long run Equilibrium

Answer 9

Check book

Question 10

Draw Short run supernormal profit to Long run

Answer 10

Check book

Question 11

Draw Short run loss to long run

Answer 11

Check book