3.3 perfect competition

characteristics of a perfectly competitive market are

homogenous products, large NO of buyers and sellers, no barriers to entry/exit

other charactersitics of a perfectly competitive market could be

common technologies and mobile resources, perfect knowledge, profit and utility maximisation

on a graph you know if it is a competitive market if

AR=MR, or if the equilibrium is decided by the interaction between supply and demand

in the SR competitive markets can make

supernormal profits or loss because there is a time lag between firms entering/exiting market shifting supply

in the long run in competitive markets only

normal profit can be made due to no barriers to entry or exit

a firms supply curve can also be seen as

the marginal cost curve above the avc curve 

the shutdown point of a firm is

when AR=AVC as below that point the business cannot even cover its variable costs

the TR graph for perfect competition will be

a straight diagonal line as MR is constant

in a competitive market profits are likely to be lower than

a market with few competitors because each firm has a very small market share therefore has a very small market power, if firms make a profit new firms will enter, increasing supply and lowering avg price meaning existing firms profits are competed away

advantages of perfectly competitive markets are

in the LR there is a lower price, so allocative efficiency, since firms produce at bottom of AC curve, there is productive efficiency, the SN profits produced in SR may increase dynamic efficiency through investment

disadvantages of perfectly competitive markets are

in LR, dynamic efficiency may be limited due to lack of SN profits, since firms are small, there are few/no economies of scale, assumptions of the model rarely apply in RL as branding, product differentiation, adverts and positive and negative externalities mean that competition is imperfect