Topic 4 - Perfect Competition Flashcards
What’s perfect competition?
1 = Many firms sell identical products to many buyers. 2 = No restrictions on entry to the market 3 = Established firms have no advantage over new ones. 4 = Sellers/Buyers well informed about prices
How does it arise?
If the minimum efficient scale of a single product is small relative to the market demand for a good or service.
Why are firms price takers?
They must take the price of the market, as each firm’s goods are perfect substitutes.
What is TR?
Price x Quantity
What is MR?
The change in TR that results from a one-unit increase in the quantity sold. Its calculated by dividing the change in TR by the change in quantity sold.
What do the market demand, demand, TR and MR curves look like?
D = horizontal
Market Demand = downwards sloping
TR = upwards sloping
MR = horizontal
What is a break-even point?
When economic profit = 0
When is economic profit maximised?
When MR = MC
What happens to entry and exit in perfect competition?
New firms enter a market in which existing firms are making economic profit.
As new firms enter a market, the market price falls and the economic profit of each firm decreases.
Firms exit a market in which they are incurring an economic loss.
As firms leave market, the market price rises and the economic loss incurred by the remaining firms decreases,
Entry/exit stops when firms make zero economic profit.
What are external economies?
Factors beyond the firms control that lowers the firms costs as the market output increases.
What are external diseconomies?
Factors outside the control of a firm that raise the firm’s costs as the market output increases.
Does it achieve efficiency?
It achieves an efficient allocation as in the long-run consumers pay the lowest possible price and marginal social benefit equals marginal social cost.
What is abnormal profit?
The difference between revenue and costs.
