ILO:
a) Characteristics of perfect competition
b) Profit maximising equilibrium in the short run and long run
c) Diagrammatic analysis
a) Characteristics of perfect competition
b) Profit maximising equilibrium in the short run and long run
c) Diagrammatic analysis
Drawing activity
Characteristics of perfect competition
1. There are many buyers and sellers, none of whom is large enough to influence price
2. There are no barriers to entry and exit from the industry
3. Buyers and sellers possess perfect knowledge of prices
4. The products are homogenous
There are few industries that meet all of these characteristics – an example is the foreign exchange market.
2. There are no barriers to entry and exit from the industry
3. Buyers and sellers possess perfect knowledge of prices
4. The products are homogenous
There are few industries that meet all of these characteristics – an example is the foreign exchange market.
Diagrammatic analysis
> Perfect competition has a large number of suppliers in the market.
> A firm can expand or reduce output without influencing price.
> The price is determined by the market because the individual firm is too small to influence price and is a price taker.
> If a firm sells all its output at the market price, then this price must be the average price or revenue.
> In addition, each extra item sold will receive the same price for each additional unit and, therefore, marginal revenue will be the same as average revenue.
> The perfectly competitive firm’s demand curve:
> A firm can expand or reduce output without influencing price.
> The price is determined by the market because the individual firm is too small to influence price and is a price taker.
> If a firm sells all its output at the market price, then this price must be the average price or revenue.
> In addition, each extra item sold will receive the same price for each additional unit and, therefore, marginal revenue will be the same as average revenue.
> The perfectly competitive firm’s demand curve:
Profit maximising equilibrium in the short run and long run
How could a firm make abnormal profits in the S/R?
Why not the L/R?
How could a firm make losses in the S/R?
Why not the L/R?
What does perfect competition tell us about efficiency?
How has this influenced economic policy?
See theory sheets
Why not the L/R?
How could a firm make losses in the S/R?
Why not the L/R?
What does perfect competition tell us about efficiency?
How has this influenced economic policy?
See theory sheets
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