Perfect Competition - Unit 3 (AQA)

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  • Created on: 22-01-13 19:23
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Economics ­ Perfectly Competitive Markets
Firms operating under these conditions will need to:
Remain price competitive
Will strive to improve the quality of their products ­ stay ahead of competitors
Assumptions of Perfect Competition:
Many Buyers & Sellers ­ Some big, Some small ­ Ensures product is sold and that
firms are price takers
No one firms dominates market ­ not big enough to affect price
Perfect Knowledge ­ Buyers & Sellers
Homogenous Products ­ Consumers have no preference over who they purchase
from and will go for the cheapest
Freedom of Entrance & Exit ­ No barriers to keep firms in or out of industry
Readily Available Information ­ Assume all firms have equal access o technological
improvements ­ Firms unlikely to engage in R&D as other firms will immediately have
access to the results
Factors of Production are perfectly mobile ­ Can undertake any type of work in any
Firms in this model have no influence over the market ­ they sell all they produce at the
going price
Price Takers - Individual firms have the accept the equilibrium market price ­ it `takes its
price from the market'
If the firm tries to sell above the £5 price = Not many customers ­ they will go elsewhere
If the firm tries to sell below the £5 price = Deluged with customers but won't be
maximising returns
Any firm wanting to MAXIMISE PROFIT will produce where...

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In the Long-Run:
Productively Efficient ­ Produce at the lowest point on the LRAC curve
Allocatively Efficient ­ Produce where AR=AC
Profit Maximises ­ Produce where MC=MR
If in the short-run, firms decide to make abnormal profits then new firms will enter into the
market to compete them away
This increases the supply within the market which forces down the price for the individual
firms back to the level of `normal profit'…read more

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In the short-run:
Normal Profit is already included in Costs to any
profit shown on these graphs is `abnormal profit'
When abnormal profit is being made ­ Other
firms will wish to enter the industry to maximise
the opportunity cost of using their resources
There are no barriers to entry so they will do so
until all abnormal profits are competed away
More firms coming into the market will shift the
supply curve to the right and the price will fall
Firms are not productively…read more


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