4.1.5.3 Perfect Competition

perfect competition

a market structure where many firms offer a homogenous/identical product

price takers(they have no control over price)

Due to a high level of competition firms in a perfectly competitive market are:

supernormal/abnormal profit

all the excess profit a firm makes above the minimum return necessary to keep a firm in business

TR - TC, where TC includes all fixed and variable costs plus minimum income necessary for the owner to be happy in that business

how is supernormal profit calculated?

incentive for other firms to enter the market

what happens when firms are making abnormal profit?

normal profit

minimum level of profit necessary to keep a firm in that line of business

demand, price, price takers, AR/MR, abnormal

Why perfectly competitive markets cannot make abnormal profits in the long run(1)?

When _______ increases, the market ____ rises. Because firms are ____ ____ there is a new _____ line above the ATC curve at the profit maximising output where MC=MR, creating ______ profit in short run

firms, supply, AR/MR, reduced

Why perfectly competitive markets cannot make abnormal profits in the long run(2)?

firm makes abnormal profit=>incentive for new ____ to join market=>________ increases=>price falls=>_____ line shifts downward=>abnormal profit _______

disappears, minimum, normal, productively

Why perfectly competitive markets cannot make abnormal profits in the long run(3)?

New firms enter the market until abnormal profit _________=>price settles at ________ ATC=>each firm earns ______ profit only=>firms produces at _________ efficient output=>P=MC in long run =>allocative efficiency

allocative and productive efficiency

Perfectly competitive markets achieve both:

allocative efficiency

means there is an optimal distribution of goods/services, considering consumer’s preferences

• achieved when P = MC

match, consumer, maximised, perfectly, P=MC, value, aligned, cost, wasted, allocatively

Allocative efficiency occurs when resources are distributed in such a way that the goods/services produced ______ consumer preferences exactly(_______ surplus _________). In a ________ competitive market, this is because firms produce where price equals marginal cost(_=__), ensuring that the _____ consumer place on a good is ______ with the ____ of producing it. Therefore, no resources are _____ and the market is __________ efficient.

productive efficiency

the ability of a firm to produce goods/services at the lowest possible cost, given the level of output and the available technology

• achieved at lowest point of ATC curve

long-run, competition, lowest, AC, minimsing, per unit of output, unable

Productive efficiency:

In the ____-___, the market forces(________) push firms to produce at the _______ point on their __ curve. At this point, they are ________ their costs ___ ____ __ _____. If a firm is not producing at this point, it would be ________ to compete with others who are producing more efficiently.

firms are unable to sustain abnormal profits in the long run

Why are firms in perfectly competitive markets not able to be dynamically efficeint?

demand, price, MR, ATC, MR, abnormal, short, incentive, supply, fall, removed, long, minimum, normal, efficient, allocatively

When demand in the market increases, the market ________ curve shifts right. As a result, the market _____ rises. Because each firm in perfect competition is a price taker this higher market price becomes the new AR = __ line for every firm. At this higher price, the firm’s AR/MR line lies above its ___ at the profit-maximising output where MC = __. Therefore, the firm makes _________ profit in the _____-run.

Because firms are now making abnormal profit, other firms have an _________ to enter the market. As a result, the market _______ curve shifts right as new firms join. This increase in supply causes the market price to ____. Therefore, abnormal profit is ________.

Entry continues until abnormal profit disappears. In the ____-run, price settles at the level where price equals the _________ ATC. At this point, each firm earns ______ profit only. As a result, the firm produces at the productively ________ output. Because price also equals marginal cost in the long run, the market is ___________ efficient.