3.4.2 perfect competition

What is perfect competition?

A market with a high degree of competition
Theoretical market structure so none exist in reality.
Closest are agriculture and forex- foreign exchange

What are the characteristics of perfect competition?

many buyers and many sellers none of whom can influence the price
Freedom of entry and exit from the industry
Buyers and sellers possess perfect knowledge- sellers must be price takers
All firms produce homogenous goods

What is profit maximising equlibrium?

Firms in sr assumed to profit maximise so produce at MC=MR. In short run can make np

what is sr loss minimisation

If all firms are making a loss then firms will leave the markets so supply decreases ( SR LOSS)
This makes prices increase until normal profits are being made ( NP LR)
AR shifts up so AC=AR - condition of np

What is sr profit maximisation?

If in sr firms making abnormal profits this attracts other firms to join the industry
As other firms join industry supply increases and price falls
Prices will fall to the point where only normal profits is made.

2 reasons perfect competition not beneficial to consumers?

Lack of variety as firms not innovative
Fluctuating prices which can decrease consumer utility