An extremely competitive market, made up of a large number of small firms.
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What are firms in perfect competition described as?
Price takers, all too small to influence price on their own.
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What are 3 assumptions of perfect competition?
Few/no barriers to entry, consumers have perfect knowledge, products are homogenous.
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Why can firms not sell at a higher price than the equilibrium price?
It will not make any sales, since consumers know about cheaper alternatives that exist.
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Why will consumers have no loyalty to any particular firm?
All products are identical.
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What are productive and allocative efficiency components of?
Static efficiency.
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When does productive efficiency occur?
When goods and services are produced at minimum average cost, or when minimum inputs are used to produce maximum outputs.
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What will happen to firms who don't achieve productive efficiency?
They will lose their market share to rival firms which can produce the same product more cheaply.
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What do highly competitive markets lead firms to do?
Produce what consumers demand.
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How do highly competitive markets lead to consumer sovereignty?
If firms don't produce what consumers demand, they will lose market share to firms that produce desired products, i.e. the consumer is king.
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What happens if other firms become aware of supernormal profits in the market?
They will enter the market, due to low barriers to entry.
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Why do only the most competitive firms survive in the market?
Overall supply in the market will increase, but increases in supply and reductions in price will only occur up to the point where normal profit is made.
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What can firms make in the short run?
Losses, normal pr
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Other cards in this set
Card 2
Front
What are firms in perfect competition described as?
Back
Price takers, all too small to influence price on their own.
Card 3
Front
What are 3 assumptions of perfect competition?
Back
Card 4
Front
Why can firms not sell at a higher price than the equilibrium price?
Back
Card 5
Front
Why will consumers have no loyalty to any particular firm?
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