4454699
Description
Mind Map by james liew, updated more than 1 year ago
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Created by james liew
almost 9 years ago
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Perfect Competition
- What is Perfect Competition?
- It is where there are many sellers,
each of whom has a very small and
insignificant part of the total
market
- It's the ideal market from consumer's and society's of
view, as the lowest price will be charged for the goods
and scarce resources are used efficiently
- It is where there are many sellers,
each of whom has a very small and
insignificant part of the total
market
- Assumptions/Characteristics of
Perfect Competition
- There are Many Buyers in the Market
Annotations:
- They accept the market price, i.e. they are a price taker and each buyer acts independently.
- There are Many Competitive Sellers in the Market
- The Goods are
Homogenous
Annotations:
- The goods supplied by each firm are exactly the same. They are perfect substitutes for each other.
- No Barriers to Entry or Exit within the Industry
- Perfect Knowledge Exists as to Prices and Profits
- Each Firm Seeks to Maximise Profits
- No Collusion Exists on the Market
Annotations:
- Buyer's don't group together with other buyer's and sellers don't group together with other seller's (to restrict quantity).
- There are Many Buyers in the Market
- Why Don't Firms in Perfect Competition
Engage in Advertising
- Homogenous Goods
Annotations:
- Because the goods are identical, an individual produce cannot differentiate their product, therefore advertising is pointless.
- Increased Cost and No Additional Revenue
Annotations:
- Advertising would increase a firm's cost and decrease its profits.
- Benefits the Entire Industry
- Homogenous Goods
- Long Run: SPECS
- SNP not earned
- Scarce Resources are used efficiently as
production is at lowest point of AC
- Cost of Production at point A
- Equilibrium occurs where MC = MR
- Quantity Q is sold at Price P
- SNP not earned
- Benefits of Perfect Competition
- Minimum Prices
Annotations:
- The firm only earns normal profit and therefore the consumer is not being exploited as only minimum prices are charged.
- No Advertising
Annotations:
- Resources will not be wasted through advertising and therefore no additional costs will be passed on to the consumer.
- Production Occurs at Lowest Point of Costs
- Efficiency is Encouraged
Annotations:
- Competition between firms will spur efficiency as those producing at lowest point of the AC will survive in the long run.
- Minimum Prices
- Disadvantages of Perfect Competition
- No Scope for Economies of Scale
Annotations:
- Because there are many small firms producing relatively small amounts, no one firm can achieve economies of scale.
- Little Choice for Consumers
Annotations:
- Undifferentiated products are unattractive and give little choice to consumers, unlike markets such as clothing and footwear.
- No incentive to Develop New Technology
Annotations:
- With perfect knowledge there is little incentive to develop new technology, as it would be shared with other companies.
- No Research and Development
- No Scope for Economies of Scale
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