Enhance Your Learning with Economics - Perfect Competition Flash Cards for quick understanding
A market structure characterized by a large number of buyers and sellers, homogeneous products, perfect information, free entry and exit, and no individual buyer or seller has control over the market price.
Features of perfect competition include a large number of small firms, identical products, perfect knowledge, perfect mobility of resources, and absence of market power.
In perfect competition, individual firms are price takers and face a perfectly elastic demand curve. The market demand and supply determine the equilibrium price and quantity.
Equilibrium in perfect competition occurs when the quantity demanded equals the quantity supplied at the market-determined price, resulting in no shortage or surplus.
In the short run, a firm in perfect competition can earn profits, incur losses, or break even. The firm's decision to produce or shut down is based on whether it covers its variable costs.
In the long run, firms in perfect competition can enter or exit the market. Profits attract new firms, while losses lead to firms exiting. Long-run equilibrium occurs when all firms earn zero economic profit.
Firms in perfect competition maximize profit by producing at the quantity where marginal cost equals marginal revenue. This occurs at the point where marginal cost curve intersects the marginal revenue curve.
In perfect competition, firms can freely enter or exit the market. Entry occurs when new firms are attracted by profits, while exit happens when firms incur losses.
Perfect competition is considered efficient because it leads to productive efficiency and allocative efficiency. It also maximizes consumer and producer surplus, resulting in overall welfare.
Although perfect competition is efficient, it may not always lead to desirable outcomes. Market failure can occur due to externalities, public goods, imperfect information, and unequal distribution of income.
Perfect competition is often compared with other market structures like monopoly, monopolistic competition, and oligopoly. These structures differ in terms of number of firms, product differentiation, and market power.
A firm in perfect competition is a price taker, meaning it has no control over the market price. It takes the price determined by the market and adjusts its quantity supplied accordingly.
In perfect competition, firms produce and sell identical or homogeneous products. There is no differentiation in terms of quality, branding, or features among the products.
Perfect competition assumes that buyers and sellers have complete and accurate information about prices, quantities, and market conditions. There are no information asymmetries or hidden knowledge.
Firms can freely enter or exit the market in perfect competition. There are no barriers to entry, such as legal restrictions or high startup costs, and firms can easily leave if they are not profitable.
In perfect competition, no individual buyer or seller has market power. Each firm is too small to influence the market price and must accept the prevailing price determined by the market forces.
Variable costs are expenses that change with the level of production. In perfect competition, firms consider variable costs when deciding whether to produce or shut down in the short run.
Economic profit is the difference between total revenue and total cost, including both explicit and implicit costs. In perfect competition, firms earn zero economic profit in the long run.
Perfect competition leads to productive efficiency, where firms produce at the lowest average cost per unit of output. This ensures that resources are used efficiently and wastage is minimized.
Allocative efficiency occurs in perfect competition when resources are allocated in a way that maximizes consumer satisfaction. The marginal benefit equals the marginal cost of production.
Consumer surplus is the difference between the price consumers are willing to pay for a good and the actual price they pay. Perfect competition maximizes consumer surplus.
Producer surplus is the difference between the price at which producers are willing to sell a good and the actual price they receive. Perfect competition maximizes producer surplus.
Externalities are costs or benefits that are not reflected in the market price. In perfect competition, externalities can lead to market failure as the true social cost or benefit is not considered.
Public goods are non-excludable and non-rivalrous goods that are provided by the government. In perfect competition, the market may underprovide public goods due to the free-rider problem.
Imperfect information refers to situations where buyers or sellers do not have complete knowledge about the market. In perfect competition, perfect information is assumed, but in reality, information may be imperfect.
Perfect competition does not guarantee equal distribution of income. In fact, it can lead to income inequality as some firms may earn higher profits than others, resulting in unequal wealth distribution.
Monopoly is a market structure characterized by a single seller or producer of a unique product with no close substitutes. It has significant market power and can set prices and quantities.
Monopolistic competition is a market structure with many firms selling differentiated products. Each firm has some market power due to product differentiation, but competition is still present.
Oligopoly is a market structure characterized by a few large firms dominating the market. These firms have significant market power and their actions can affect market outcomes.
Market forces refer to the interaction of supply and demand that determines the equilibrium price and quantity in a market. In perfect competition, market forces play a crucial role in determining prices.
A shortage occurs in perfect competition when the quantity demanded exceeds the quantity supplied at the prevailing price. This leads to upward pressure on prices.
A surplus occurs in perfect competition when the quantity supplied exceeds the quantity demanded at the prevailing price. This leads to downward pressure on prices.
A firm in perfect competition breaks even when its total revenue equals its total cost, resulting in zero economic profit. It covers all its costs but does not earn any additional profit.
Zero economic profit occurs in perfect competition when total revenue equals total cost, including both explicit and implicit costs. Firms earn a normal rate of return on their investment.
The market-determined price in perfect competition is determined by the interaction of demand and supply. It is the price at which the quantity demanded equals the quantity supplied.
Quantity supplied refers to the amount of a good or service that producers are willing and able to sell at a given price. In perfect competition, quantity supplied is determined by the market price.
Quantity demanded refers to the amount of a good or service that consumers are willing and able to buy at a given price. In perfect competition, quantity demanded is determined by the market price.
Marginal cost is the additional cost incurred by producing one more unit of output. In perfect competition, firms maximize profit by producing at the quantity where marginal cost equals marginal revenue.
Marginal revenue is the additional revenue earned by selling one more unit of output. In perfect competition, marginal revenue equals the market price as each unit is sold at the same price.
The marginal cost curve shows the relationship between the quantity of output produced and the marginal cost. In perfect competition, the marginal cost curve intersects the marginal revenue curve at the profit-maximizing quantity.
The marginal revenue curve shows the relationship between the quantity of output sold and the marginal revenue. In perfect competition, the marginal revenue curve is a horizontal line at the market price.
Fixed costs are expenses that do not change with the level of production. In perfect competition, fixed costs are not considered in short-run production decisions as they are sunk costs.
Average total cost is the total cost per unit of output. It is calculated by dividing the total cost by the quantity of output. In perfect competition, firms aim to minimize average total cost.
Average variable cost is the variable cost per unit of output. It is calculated by dividing the variable cost by the quantity of output. In perfect competition, firms consider average variable cost in short-run production decisions.
Average fixed cost is the fixed cost per unit of output. It is calculated by dividing the fixed cost by the quantity of output. In perfect competition, firms do not consider average fixed cost in short-run production decisions.
Economies of scale occur when the average cost of production decreases as the quantity of output increases. In perfect competition, firms can benefit from economies of scale in the long run.
Diseconomies of scale occur when the average cost of production increases as the quantity of output increases. In perfect competition, firms may experience diseconomies of scale if they become too large.
Constant returns to scale occur when the average cost of production remains constant as the quantity of output increases. In perfect competition, firms may experience constant returns to scale in the long run.
Product differentiation refers to the process of distinguishing a product or service from others in the market. In perfect competition, products are homogeneous and there is no product differentiation.
The number of firms in perfect competition is large, with many small firms operating in the market. This ensures that no individual firm has a significant impact on the market price.
Product homogeneity refers to the fact that all firms in perfect competition produce and sell identical or homogeneous products. There is no differentiation in terms of quality, branding, or features among the products.
Market structure refers to the characteristics of a market, including the number of firms, product differentiation, and market power. Perfect competition is one of the market structures.