Perfectly Competitive Market

Question 1

Effect of competitive markets on allocative efficiency

Answer 1

Firms are forced to maximise output, minimise opportunity costs, achieving allocative efficiency

Question 2

Effect of competitive markets on dynamic efficiency

Answer 2

Firms forced to be more responsive to market shifts

Question 3

Effect of competitive markets on intertemporal efficiency

Answer 3

Competitiveness drives firms to be sustainable and efficient

Question 4

Effect of competitive markets on technical/productive efficiency

Answer 4

Firms are forced to keep prices low, maximising productivity and lowering costs

Question 5

Pre-condition - Consumer sovereignty exists

Answer 5

Consumers dictate allocation of resources, affecting relative profits

Question 6

Pre-condition - Firms have no market power or control

Answer 6

Firms are price takers

Question 7

Pre-condition - Ease of Entry and exit

Answer 7

Firms respond to relative prices, profits, there are low barriers

Question 8

Pre-condition - Products are homogenous

Answer 8

All products are the same, are substitutes for one another, aren’t advertised, no brand names

Question 9

Pre-condition - Resources are mobile

Answer 9

Relative prices determine resource allocation

Question 10

Pre-condition - Behavior is rationale

Answer 10

Firms - Want to maximise profit, allocate resources based off relative profits
Consumers - Want to maximise utility (satisfaction)

Question 11

Pre-condition - There is Perfect knowledge

Answer 11

Buyers and sellers have complete and accurate knowledge of product being traded, so they can make informed and rational decisions on resource allocation

Question 12

Advantages of perfectly competitive market

Answer 12

-Achieves allocative efficiency (as firms use relative prices as a signal to devote resources to meet consumer preference)
-Achieves technical efficiency (firms are incentivised to lower production costs with high competition, increase productivity)

Question 13

Disadvantages of a perfectly competitive market

Answer 13

-Market failure (profit-driven mentality can lead to an underallocation of resources in public goods)
-Aggressive cost cutting can increase safety risks, quality of product falls

Question 14

Effect on MLS

Answer 14

-Increase purchasing power as technical efficiency, lower inflation occur

Question 15

Effect on NMLS

Answer 15

-Decrease in MLS as excessive production can cause poor air quality, environmental degradation