Competitive Markets

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  • Created by: Ellie
  • Created on: 26-05-15 12:19
What are the conditions of perfect competition?
A large number of buyers and sellers, perfect information, Firms being able to sell as much as they wish to, independent actions by firms will not influence the ruling market price, homogeneous product, complete freedom to enter and exit the market
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Describe a perfectly competitive firm in the long run
Firms are making supernormal profits in the short run the ruling market price signals to firms outside the marked to join the industry, causes profits to decrease, firms only make normal profit meaning there are no incentives to enter or exit
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Explain perfect competition in reality
It is very difficult to find examples of perfect competition in reality, foreign exchange dealings have many buyers and sellers, a homogeneous product and relatively small traders
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How much should a firm produce?
Firms decided their output based on the point of profit maximisation so where MC = MR
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Describe a perfectly competitive firm in the short run
Perfectly competitive firms make supernormal profit in the short run but the short run equilibrium only lasts as long as new entrants are kept out of the market. Each firm passively accepts the ruling market price.
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When can a perfectly competitive firm make a loss?
In the short run when its average total costs are below the point of profit maximisation
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When will firms decide to leave the industry ?
When a firm is making a loss (TC are higher than TR) If the price is above AVC the firm should continue in production in the short run in order to offset some of the fixed costs. If price is below AVC the firm should shut down immediately
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Describe perfectly competitive revenue curves
It has a perfectly elastic demand curve, If the firm sold output below market price it would make a loss and if it sold above there would be cheaper perfect substitute goods
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How useful is perfect competition?
Perfect competition is used as a model to compare with, Normal competitive behaviour like advertising isn't possible in perfect competition, its not dynamically efficient as there's no incentives to carry out r and d
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How efficient is perfect competition?
It is productively allocatively and x efficient
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How efficient is a monopoly?
It is productively and allocatively inefficient, they can be dynamically efficient as supernormal profits allow them to invest in R and D but theres a lack of incentives due to barriers to entry. It is X inefficient due to unnecessar production costs
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What are the benefits of perfect competition?
It drives an improvement in welfare and efficiency, drives under performing firms out of the market and shifts the market share to the more efficient firms, encourages firms to innovate and adopt best practice techniques
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Define economic efficiency
Economic efficiency minimises costs incurred with minimum undesired side effects
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Define static efficiency
This measures technical, productive, x and allocative efficiency at a particular point in time
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Describe technical efficiency
At any level of output production is technically efficient if it minimises the inputs of capital and labour needed to produce that level of output. It is technically efficient it it maximises output produced from the available factor resources
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Describe Dynamic efficiency
This measures the extent to which static efficiency improves over time. Improvements in dynamic efficiency result from the introduction of better methods of producing existing products like invention innovation and R and D
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Describe Allocative efficiency
It occurs when its impossible to improve overall economic welfare by reallocating resources between industries and markets, It occurs when P=MC
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Describe X-efficiency
X inefficiency is when there is organisational slack (spare capacity). A firm must be technically inefficient to be x inefficient and is sometimes caused by overpaying workers.
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Describe productive/ cost efficiency
It is when a firm minimises the average costs of production, it is more long run than short run and is shown by the lowest point on the LRAC curve. Any point that lies on the PPF is technically and productively efficient.
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Card 2

Front

Describe a perfectly competitive firm in the long run

Back

Firms are making supernormal profits in the short run the ruling market price signals to firms outside the marked to join the industry, causes profits to decrease, firms only make normal profit meaning there are no incentives to enter or exit

Card 3

Front

Explain perfect competition in reality

Back

Preview of the front of card 3

Card 4

Front

How much should a firm produce?

Back

Preview of the front of card 4

Card 5

Front

Describe a perfectly competitive firm in the short run

Back

Preview of the front of card 5
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