Perfect competition
- Created by: Deborah
- Created on: 28-02-16 12:48
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- Perfect Competition
- Conditions
- 1. Large no. of buyers and sellers
- 2. Perfect information about market- prices of goods and costs of production
- 3. All firms are price takers
- 4. HomogenousProducts- identical so firms can only compete on price
- 5. Freedom of entry and exit to the market- no sunk costs
- MR is perfectly elastic (horizontal) because consumers will only pay one price for the product.
- AR and D also horizontal.
- Firm only makes normal profit in long-run because it produces where ATC=AR
- In the short-run profits and losses are possible.
- MR=AR=D curve is above the AC curve so firm makes super-normal profit.
- Incentive for more firms to enter the market which increases supply which decreases equilibrium price to long-run position of AC=AR (normal profit)
- MR=AR=D curve is below the AC curve so the firm makes sub-normal profit.
- Firms leave the market which reduces the supply which in turn increases the market equilibrium price to long-run position of AR=AC (normal profit)
- MR=AR=D curve is above the AC curve so firm makes super-normal profit.
- Efficiency
- Firm produces on ATC it is technically efficient and also x-efficient.
- Produces on lowest point of ATC so is productively efficient.
- Produces where MC=P (P is price) so is allocatively efficient.
- Welfare Analysis
- Consumer Surplus- the difference between what you were willing to pay for a product and what you had to pay. It is the area above the price but below the demand curve.
- Producer Surplus- area below the price but above the supply curve. Consumer willing to pay higher price than the price you would be happy to sell it at.
- Conditions
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