Flashcards
Perfect Competition Flashcards
Cards in this deck (14)
- 1Charcteristicsmany buyers and sellers
price takers
no individual firm/buyer can influence market price
homogenous product
no barriers to entry/exit
compete until normal profits are left
perfect knowledge for consumers and producers
no economies of scale are possible - 2Demand curve in PCperfectly elastic (horizontal line)
The demand curve for each firm is perfectly elastic because has to charge market price. Will always buy the cheapest option. This doesn't mean the price is fixed.
In PC demand curve is also AR and MR curve. Also equal to price. - 3profit max in short runIn the short run can produce or temp shut down. Have three options: abnormal profits, breakeven and losses.
- 4Profit maximising output in the SR diagramspractise on paper
- 5Profit maximisation in the long runNumber of firms is variable.
two options: leave industry or produce.
CAN ONLY MAKE NORMAL PROFITS
Abnormal profits - if abnormal profits are made new firms will enter the market attracted by these until they are competed away. In the LR firms can only make normal profits.
When losses are made firms leave meaning supply falls and price rises the breakeven again. - 6Is PC productively efficientIn the short run, firms making abnormal profit or losses in PC are not productively efficient
When firm is breaking even (long or short) it is productively efficient because MC=ATC - 7P=MCP = MC
P: the value consumer place on a product (ie marginal utility)
MC: in PC the firms marginal cost curve is also supply curve.
If P>MC - value to society of consuming an extra unit is greater than the cost to society of producing an extra unit. Society would be better off if another unit was created
If P - 8Is perfect competition allocatively efficientYes in both SR and LR, because at equilibrium p=mc (because p=mr=mc). Maximises social welfare.
- 9Consumer surplusconsumer surplus rises because some consumer paying market price would have been prepared to pay more, shown by demand curve.
- 10producer surplusproducer surplus arises because producers would be prepared to supply at a price below the equilibrium. They gain extra revenue because they sell all units at market price.
- 11social welfareconsumer+producer surplus will be at their maximum. This is social welfare/community surplus.
In PC at equilibrium, market price=MC, this means that the market is allocatively efficient because every firm is allocatively efficient. - 12Advantages of PCfirms cannot exploit consumers by charging above market price
no barriers to entry/exit which means more firms.
Makes it responsive to consumer needs and makes competitive market place.
Only normal profits in the long run.
It is allocatively efficient.
Maximises community surplus
In the long run is productively efficient. - 13Disadvantages of PCLittle chance for innovation because firms only make normal profits.
No EOS - firms remain small.
No real choice - homogenous products
Does not exist in reality. - 14profit(AR-ATC) x output
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- Highers Economics (MicroEconomics) Flashcards on Perfect Competition Flashcards, created by anna boyd on 16/01/2019.
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- anna boyd
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