Perfect Competition

Question 1

What are the assumptions of perfect competition?

Answer 1

• The industry is made up of a very large number of firms.
• No firm is big enough to have an effect on the price of the product.
• The firms all produce exactly identical to each other.
• There are no barriers to entry or exit
• All producers and consumers have perfect knowledge of the market

Question 2

What is it called when no individual firm is big enough to have an effect on the price?

Answer 2

The firms are called “price-takers”

Question 3

What is it called when goods are exactly identical?

Answer 3

Homogenous

Question 4

What is the closest example to perfect competition?

Answer 4

Agricultural products

Question 5

What do the demand curve for the industry look like in perfect competition?

Answer 5

Normal downwards sloping demand curve.

Question 6

What does the demand curve for the firm look like in perfect competition?

Answer 6

Horizontal

Question 7

Why is the demand curve for the firm horizontal?

Answer 7

Because the firm is a price taker so it must sell at the industry price, P. If they try to sell them at another price then the consumers will simply buy the product from another firm, since the goods are homogenous.

Question 8

How can firms in perfect competition maximise profit?

Answer 8

Where MC = MR