Perfect Competition - Chapter 3
- 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.
- Output = Min ATC
- When a firm operates a minimum ATC, producing the maximum amount of output.
- Allocative efficiency:
- The optimum allocation of scarce resources to meet consumer demands.
- P = MC
- Achievable in: the LR and SR
- P = MC
- The optimum allocation of scarce resources to meet consumer demands.
- 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.
- Efficiency over a period of time i.e. new techniques and products which increase economic growth.
- Static efficiency:
- Efficiency at a point in time - includes allocative and productive efficiency.
- 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).
- FOR:
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