Perfect Competition

james liew
Mind Map by james liew, updated more than 1 year ago
james liew
Created by james liew about 4 years ago
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Leaving Certificate Economics Mind Map on Perfect Competition, created by james liew on 02/07/2016.
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Perfect Competition
1 What is Perfect Competition?
1.1 It is where there are many sellers, each of whom has a very small and insignificant part of the total market
1.2 It's the ideal market from consumer's and society's of view, as the lowest price will be charged for the goods and scarce resources are used efficiently
2 Assumptions/Characteristics of Perfect Competition
2.1 There are Many Buyers in the Market

Annotations:

  • They accept the market price, i.e. they are a price taker and each buyer acts independently.
2.2 There are Many Competitive Sellers in the Market
2.3 The Goods are Homogenous

Annotations:

  • The goods supplied by each firm are exactly the same. They are perfect substitutes for each other.
2.4 No Barriers to Entry or Exit within the Industry
2.5 Perfect Knowledge Exists as to Prices and Profits
2.6 Each Firm Seeks to Maximise Profits
2.7 No Collusion Exists on the Market

Annotations:

  • Buyer's don't group together with other buyer's and sellers don't group together with other seller's (to restrict quantity).
3 Why Don't Firms in Perfect Competition Engage in Advertising
3.1 Homogenous Goods

Annotations:

  • Because the goods are identical, an individual produce cannot differentiate their product, therefore advertising is pointless.
3.2 Increased Cost and No Additional Revenue

Annotations:

  • Advertising would increase a firm's cost and decrease its profits.
3.3 Benefits the Entire Industry
4 Long Run: SPECS
4.1 SNP not earned
4.2 Scarce Resources are used efficiently as production is at lowest point of AC
4.3 Cost of Production at point A
4.4 Equilibrium occurs where MC = MR
4.5 Quantity Q is sold at Price P
5 Benefits of Perfect Competition
5.1 Minimum Prices

Annotations:

  • The firm only earns normal profit and therefore the consumer is not being exploited as only minimum prices are charged.
5.2 No Advertising

Annotations:

  • Resources will not be wasted through advertising and therefore no additional costs will be passed on to the consumer.
5.3 Production Occurs at Lowest Point of Costs
5.4 Efficiency is Encouraged

Annotations:

  • Competition between firms will spur efficiency as those producing at lowest point of the AC will survive in the long run.
6 Disadvantages of Perfect Competition
6.1 No Scope for Economies of Scale

Annotations:

  • Because there are many small firms producing relatively small amounts, no one firm can achieve economies of scale.
6.2 Little Choice for Consumers

Annotations:

  • Undifferentiated products are unattractive and give little choice to consumers, unlike markets such as clothing and footwear.
6.3 No incentive to Develop New Technology

Annotations:

  • With perfect knowledge there is little incentive to develop new technology, as it would be shared with other companies.
6.4 No Research and Development
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