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Perfect competition summary

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  • 1. A2 Microeconomics - Tutor2u Aspects of Perfect Competition
  • 2. Assumptions of a Perfectly Competitive Market Each firm too small to affect price via a change in supply Homogeneous products that are perfect substitutes for each other Consumers have complete information about prices Transactions between buyers and sellers are costless All industry participants and new entrants have equal access to resources No barriers to entry & exit of firms in the long run A price taker Racecourse bookmakers Street Markets How close are these markets to perfect competition? Many firms Transactions ‘costless’ Products not homogenous (different odds) Many firms ‘Homogenous’ product Some barriers to setting up stall
  • 3. Perfect Competition Price, Cost Price, C ost Output Output
  • 4. Perfect Competition: The Market and Individual Firms Price, C ost Market Supply and Demand Price, C ost Revenues, Costs and Profits for a Competitive Firm MC MS AC P = AR = MR P Abnormal profits MD Q Output Q Output
  • 5. Long Run Equilibrium under Perfect Competition Price, C ost Market Supply and Demand Price, C ost Revenues, Costs and Profits for a Competitive Firm MC S S1 AC P1= AR1 = MR1 P1 Normal profits D Q1 Output Q1 Output
  • 6. Does Perfect Competition lead to economic efficiency? Cost & Price Perfectly Competitive Market Entry of new firms drives market price lower S1 P1 S2 P2 D1 Allocative Efficiency The value consumers place on a good or service equals the cost of the resources used up in production MC AC Productive Efficiency When the output is produced at minimum average total cost Dynamic Efficiency The productive efficiency of a firm over a period of time. Output (Q)
  • 7. Does Perfect Competition lead to economic efficiency? Cost & Price Perfectly Competitive Market Entry of new firms drives market price lower S1 P1 S2 P2 D1 Allocative Efficiency In the long and short run price is equal to MC – therefore allocatively efficient MC AC Productive Efficiency In the long run, price is at lowest possible AC, therefore productively efficient Dynamic Efficiency Output (Q) Without drive to innovate products, the dynamic efficiency in competitive markets is low.
  • 8. Get help from fellow students, teachers and tutor2u on Twitter: #econ3 @tutor2u_econ