5.3 Perfect competition

perfect competition

where there is infinately many producers with an insignificant market share, a homogenous good, no barriers to entry or exit and perfect knowledge.

Key charectaristics of perfect comp

• homogenous good

• infinite number of buyers and sellers

• perfect information

• no barriers to entry or exit

• diluted market

• price takers

• no gov intervention

• norma

examples of perfect competition

crop farming, dairy industry

Why may perfect competition not result in an efficient allocation of resources

there may be negetive externalities not included in the costs

Evaluate the reality of perfect comp

It is a model, one end of the spectrum, it provides a theoretical benchmark against which we can compare real-world markets.

is perfect competition allocatively efficient

In the long run yes as price = MC therfore consumers pay exaclty what is costs to produce the last unit

In the short run not necessarly allocatively efficient eg if making supernormal profit

is perfect competition productively efficient

in the long run yes as firms operate at the lowest per unit costs due to perfect information

is perfect competion dynamically efficeint

No, it is assumed that firms need profits to invest and innovate → therefore not dynamically efficient.

However in the real world firms could have wealthy owners/investors, raise equity or take loans to invest.

why does MR=AR in perfect competion

The firms are price takers and there is an infinte supply of consumers so firms can sell any quantity at the same price.

why is D perfectly elastic in perfect comp

As there are an infinite number of buyers and sellers, a firm will not increase its revenue by reducing the price as they can sell an infinite number at the market price, and if they reduce their price all firms will lower price and no one stands to gain. At the same time, because the good is homogenous, if a firm increases the price consumers will switch to a different firm selling at the market price which is easy to do because of perfect competition

is perfect competion x-efficient

Likley yes as in a competitive market and profit margins are ultra-low so firms cannot afford to have waste

however there could be lots of duplication

why may perfect competition lead to a non efficient allocation of reasources (explanaition)

externalities are not accounted for

buienesses opperate at the point MC = MR which only accounts for private costs and benefits

does not take into external costs to the third party

leading to an over or unerallocation of resources