Chapter 3 - Competitive markets and perfect competition

Chapter 3 - Competitive markets and perfect competition

1. Perfect competition assumptions

   • Many buyers and sellers
   • Firms are price takers
   • homogenous product
   • perfect knowledge of product/service
   • perfect mobility of factors
   • readily available information
   • No barriers to entry or exit

2. Super-normal profit in short term only

3. In long run firms are statically efficient, but not dynamically efficient

   • Static - Allocative(AR=MC) & Productive(MC=AC)
   • Dynamic - R+D that lowers the LRAC

4. Shutdown point - firm will choose to continue production or stop trading depending on which option gives a lower loss

   • Cannot price below AVC curve, else it shuts down immediately

5. Agriculture resembles P.C.