efficiency and competition

Question 1

Types of Efficiency 1

Answer 1

Productive, allocative, x, dynamic

Question 2

Types of Efficiency 2

Answer 2

Efficiencies of scale - This occurs when a firms produces on the lowest point of its long run average cost, and therefore benefits fully from economies of scale.
Social efficiency - This includes all external costs and benefits. This occurs where social cost = social benefit

Question 3

Features of Perfect Competition:

Answer 3

1. Many small firms.
2. Freedom of entry and exit; this will require low sunk costs.
3. All firms produce an identical or homogenous product.
4. All firms are price takers; therefore a firm’s demand curve is perfectly elastic.
5. Perfect information and knowledge.

Question 4

long run perfect competition

Answer 4

• In the industry, the market price will be set at the intersection of supply and demand (Pe).
• Firms are price takers. They can’t sell higher than Pe so their demand curve is perfectly elastic.
• The individual firm will maximise output where MR = MC at output Q1

Question 5

perfect competition - Changes in Equilibrium (what they do in the long run)

Answer 5

• If there is an increase in market demand there will be an increase in the market price.
• Therefore the individual demand curve and hence AR will shift upwards.
• This will cause firms to temporarily make supernormal profits. This will attract new firms into the market, causing prices to fall back to Pe.
• If firms are making a loss, some firms will close down, causing the market price to rise.
• Therefore in the long run, firms will make normal profits (AR=AC).

Question 6

Efficiency Of Perfect Competition

Answer 6

1. Allocative Efficiency This is because the long run equilibrium occurs where P = MC.
2. Productive Efficiency This is because firms produce at the lowest point on the SRAC.
3. X efficint. Competition between firms will act as a spur to increase efficiency and make sure firms use the best combination of inputs.
4. Resources will not be wasted through advertising because products are homogenous.

Question 7

Disadvantages of Perfect Competition

Answer 7

1. No scope for economies of scale; this is because there are many small firms producing relatively small amounts. Industries with high fixed costs would be particularly unsuitable to perfect competition.
2. Undifferentiated products are boring giving little choice to consumers.
3. Lack of supernormal profit may make investment in R&D unlikely; this would be important in an industry such as pharmaceuticals.
4. With perfect knowledge, there is no incentive to develop new technology because it would be shared with other companies.
5. If there are externalities in production or consumption there is likely to be market failure without govt intervention.

Question 8

A competitive market is?

Answer 8

one where no one firm has a dominant position, but the consumer has plenty of choice when buying goods or services.

Question 9

In competitive markets we should expect

Answer 9

1. Firms to have a small share of the market.
2. Few barriers to entry.
3. Low prices for consumers.
4. Close to allocative efficiency. (price = marginal costs)
5. Incentives for firms to cut costs and develop new products (leading to dynamic and x-efficiency.
6. Profits will be lower than in markets with monopoly power.
7. Greater choice for consumers.

Question 10

Short run perfect competition

Answer 10

Under perfect competition, firms can make super-normal profits or losses.

Question 11

Perfect competition benefits

Answer 11

Because there is perfect knowledge, there is no information failure and knowledge is shared evenly between all participants
No monopoly power
Maximum economic welfare and consumer surplus