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perfect competition cheat sheet
Characteristics of Perfect competition
large numbers of buyers and sellers |
homogenous product (all perfect substitutes) |
no barriers to entry or exit from this market |
perfect knowledge/information between buyers and sellers |
firms are profit maximisers (MC=MR) |
firms are price takers |
all firms are small |
efficiency
allocative efficiency |
in both the short and long run, P=MC and thus allocative efficiency is achieved. |
productive efficiency |
ensuring the costs of production are as low as they can be |
dynamic efficiency |
in perfect competition this will not be achieved. |
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Assumptions of the model
homogenous products |
perfect resource mobility |
free entry to entry and exit |
perfect / complete information |
large number of firms |
limitations of the model
unrealistic assumptions |
limited possibilities to take advantage of economies of scale |
firms cannot expand that much |
lack of product variety |
consumers do not have variety |
waste of resources in the process of long-run adjustment |
does not make enough money to invest in R & D |
ignores market failures |
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short-run perfect competition
short-run
only in the short-run, supernormal profits are achieved. It attracts new firms into the market |
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long-run perfect competition
long-run equilibrium
In perfect competition, no firm will make supernormal profits in the long run. This is because any short-term supernormal profits attract new firms to the market (since there are no barriers to entry). This means supernormal profits are ‘competed away’ in the long term — i.e. firms undercut each other until all firms make only normal profit. |
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