Competitive Markets

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Define Perfect Competition
Perfect Competition is the name given to a theoretical construct useful in understanding the behavior of small firms operating in highly competitive markets.
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The characteristics of a PC firm
The products are homogeneous; there are many buyers and sellers; they are price takers; there is freedom to enter and exit the market; there is perfect knowledge.
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Examples of Perfectly Competitive industies
Agriculture, stock market, the financial sector(e.g. banks)
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What kind of demand do perfectly competitive firms have?
An individual perfectly competitive firm is faced with a perfectly elastic demand curve, therefore it is horizontal. So you can sell as much as you like at a certain price.
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What happens if a PC firm doubles or halves their output?
There are many buyers and sellers in a PC firm therefore they can produce and sell as much or as little as they want. If they double their output they can still sell them all but it will have little effect on market supply.
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What happens if PC firms sell above PE (price equilibrium)?
Due to the perfect knowledge attained by customers, firms cannot charge above PE or their competitors because customers will change to the firm's competitors who are selling for cheaper.
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What happens if a firm sells below the PE?
There is no advantage to be gained from selling below the market price; it will reduce profit or create losses
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What is the goal of a business?
Profit Maximisation which is where: MC=MR
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Other cards in this set

Card 2

Front

The characteristics of a PC firm

Back

The products are homogeneous; there are many buyers and sellers; they are price takers; there is freedom to enter and exit the market; there is perfect knowledge.

Card 3

Front

Examples of Perfectly Competitive industies

Back

Preview of the front of card 3

Card 4

Front

What kind of demand do perfectly competitive firms have?

Back

Preview of the front of card 4

Card 5

Front

What happens if a PC firm doubles or halves their output?

Back

Preview of the front of card 5
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