Perfect Competition

Question 1

market

Answer 1

a means by which buyers and sellers are brought together so that goods and services can be bought and sold

Question 2

industry

Answer 2

group of firms selling goods/services on a particular market

this means all the firms in an industry are engaged in the production of similar products

Question 3

market structure

Answer 3

the economic circumstances under which a good or service is traded

Question 4

perfect competition

Answer 4

lots of firms producing identical goods/services

Question 5

monopoly

Answer 5

one firm supplies all the goods/services

Question 6

imperfect competition

Answer 6

many different firms producing similar but not identical goods/services

duopoly- two firms produce the total output
oligopoly- many firms produce the total output

Question 7

assumptions under perfect competition

Answer 7

1. there is a large number of relatively small firms in the industry
2. there is a large number of relatively small consumers in the industry
3. firms aim to make max. profit
4. freedom of entry to/from industry
5. widespread knowledge of profits being earned in the industry
6. products are homogenous
7. all firms have a perfectly elastic supply of the F.O.P
8. all firms produce at min. average cost

Question 8

implications of the assumptions under PC

Answer 8

not very common in reality
applies to a small proportion of goods/services eg:
-fresh fruit and veg
-stock markets
-foreign currency markets

Question 9

currency market

Answer 9

• homogenous product - ie a dollar is a dollar wherever you trade it
• many buyers and sellers - all price takers
• high quality real time info and low transaction costs

Question 10

price taker

Answer 10

any firm that cannot determine its own price

Question 11

perfect competition diagram long run

Answer 11

PRICE: AR=MR=D as it is a price taker
QUANTITY: assuming the firm wants to make max. profits, it will produce the quantity where MR=MC provided MC>MR for all quantities after that
PROFIT: the firm is earning normal profit, as if they were earning above more firms would enter the industry

Question 12

advantages of perfect competition

Answer 12

• minimum prices are charged
• no advertising needed, lowers costs
• efficiency is encouraged, which benefits society, as only firms who produce at the lowest AC will survive
• no exploitation of customers as no SNPs

Question 13

disadvantages of perfect competition

Answer 13

• no choice to the consumer as all products are homogenous
• all firms are relatively small, and therefore do not benefit from economies of scale
• lack of SNPs discourage R&D and entrepreneurship

Question 14

why does a firm under perfect competition not engage in advertising

Answer 14

1. would raise costs without raising a firms sales, as consumers cannot distinguish one firms output from another
2. each firm has a perfectly elastic demand for its product at existing prices
3. advertising by a single firm would benefit the entire industry