3.4.2

Why do we study perfect competition?

not because it exists but because it underpins the operation of all markets

What will perfect competition in production guarantee?

economic efficiency

What characteristics does a perfectly competitive market have?

- perfect information
- homogenous goods
- no barriers to entry/exit
- "infinite" number of firms
- firms profit maximise
- price takers

What happens in the short run?

- the firm can make abnormal profits/losses
- act as a signal to enter/leave the market
- this alters the market supply curve

What happens in the long run?

normal profits

Why is it a good concept?

- lower prices for consumers due to lack of control over the market
- allocative and productive efficiency achieved
- no barriers to entry and exit and perfect information keeps costs low

Why is it a bad concept?

- lack of long run supernormal profit removes incentive to take risks
- no dynamic efficiency
- lower amount of choice as homogenous products

What can no firm do?

influence price (supply increase shifts firms supply curve right, such a small influence it has no impact on market price)