Perfect Competition - Chapter 3

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  • Created by: sammilaw
  • Created on: 25-10-15 10:12
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  • Perfect Competition
    • Chapter 3
    • A market in which there are lots of buyers and sellers.
    • Assumptions:
      • Homogeneous goods - products all the same.
      • Firms are price takers.
      • There is no monopoly or no firm big enough to dominate the market.
      • No barriers to entry or exit.
      • Factors of production are perfectly mobile.
      • Firms have perfect information.
    • Efficiency:
      • Productive efficiency:
        • When a firm operates a minimum ATC, producing the maximum amount of output.
          • Output = Min ATC
            • Achievable in: the LR not SR.
      • Allocative efficiency:
        • The optimum allocation of scarce resources to meet consumer demands.
          • P = MC
            • Achievable in: the LR and SR
      • Dynamic efficiency:
        • Efficiency over a period of time i.e. new techniques and products which increase economic growth.
          • Unlikely in a perfect competition situation as it requires supernormal profits to invest.
      • Static efficiency:
        • Efficiency at a point in time - includes allocative and productive efficiency.
    • Structural performance and conduct model:
      • A model used to determine how an industry is likely to operate.
      • Structure:
        • Number and size of buyers and sellers.
        • Degree of product differentiation
        • Level of barriers to entry.
      • Performance:
        • Welfare maximisation.
        • Achieving highest output.
      • Conduct:
        • Activities of the industry's buyers and sellers.
    • Application:
      • Perfect competition is a theory = no pure example.
      • FX Market as perfectly competitive:
        • FOR:
          • Homogeneous goods - a US dollar will be the same wherever it is traded.
          • Many buyers and sellers - no one agent in the market can influence the price on a persistent basis (price takers).
          • High quality information - Access to real time information and the background analysison the factors driving the prices of currencies.
        • AGAINST:
          • Market can be influenced by official intervention - buying and selling of currencies by governments.
          • Costs involved for a bank when establishing a new trading platform for currencies.
            • They need capital equipment and skilled labour (currency traders and researchers).


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