20 Questions
What has the Internet substantially reduced in many markets?
Imperfections that prevent perfect competition
The Internet has increased the minimum efficient scale of firms.
False
What has the Internet enabled consumers to do quickly?
Compare prices and access vast quantities of information
The Internet has weakened the _______________ problem that has impaired access to the full range of sellers.
immobility
Match the benefits of the Internet with their descriptions:
Reducing transaction costs = Easier to find the best deal and process transactions Enhancing price comparison = Consumers can compare prices quickly Reducing minimum efficient scale = Barriers to entry are reduced for firms
What is an outcome of the Internet's impact on traditional suppliers?
They have been forced to respond to cyber outlets
The Internet has increased the cost of transferring funds between accounts.
False
What has the Internet enabled businesses to reduce?
Costs
The Internet has presented consumers with an enormously enhanced ability to _______________ prices.
compare
What has the Internet provided to consumers?
Wider choice
What is an outcome of the perfect competition in the free market?
Pareto optimality
The Internet has increased the minimum efficient scale of firms.
False
How has the Internet affected buyers' ability to compare prices?
The Internet has presented consumers with an enormously enhanced ability to compare prices.
The Internet has weakened enormously the _______________ problem that has impaired access to the full range of sellers.
immobility
What is a benefit of the Internet in terms of transaction costs?
Reduced administration costs
The Internet has increased the cost of transferring funds between accounts.
False
Match the benefits of the Internet with their descriptions:
Reduced transaction costs = Lower administration costs Enhanced price comparison = Quickly accessing vast quantities of information Increased market access = Weakened immobility problem Reduced minimum efficient scale of firms = Lower barrier to enter markets
What has the Internet provided to consumers in terms of market information?
Wider choice and market information.
Using the Internet for transferring funds between accounts costs less than traditional over-the-counter _______________.
transactions
What impact has the Internet had on traditional suppliers?
Forced them to respond to cyber outlets
Study Notes
Characteristics of Perfect Competition
- Perfect competition is a market structure where individual firms have no influence over the market price.
- Firms are price takers, meaning they cannot influence the price of a good or service.
- The following conditions are necessary for perfect competition:
- Large number of small sellers and buyers
- Perfect substitutes (homogeneous products)
- Perfect knowledge (all producers and consumers are aware of the market price)
- Perfect mobility (free entry and exit of firms)
- No collusion (independent action among buyers and sellers)
- No external influence (government or other groups)
Difficulties in Satisfying the Assumptions of Perfect Competition
- In reality, it is difficult to achieve perfect competition due to:
- Imperfect knowledge
- Barriers to entry and exit
- Differentiation of products
- Imperfect mobility
- Collusion among firms
Relevance of the Perfectly Competitive Model
- Despite its limitations, the perfectly competitive model is useful as a benchmark for evaluating the competitiveness of real-world markets.
- It serves as an ideal or standard for judging the performance of firms in more typical market structures.
Industries Close to Perfect Competition
- Examples of industries that approximate perfect competition:
- Foreign exchange markets
- Stock markets
- Commodity markets (e.g. copper, tin, corn, coffee, tea)
- Electronic marketplaces (e.g. Amazon)
Output Decisions under Perfect Competition
- The individual firm in a perfectly competitive market:
- Is a price taker
- Has a perfectly elastic demand curve
- Maximizes profit by producing where marginal revenue equals marginal cost
- May earn supernormal profit or make a loss in the short run
Deriving the Perfectly Competitive Firm's Supply Curve
- The firm's short-run supply curve is the portion of the marginal cost curve above the average variable cost curve.
- The firm's long-run supply curve is the marginal cost curve above the minimum long-run average total cost curve.
Long-Run Equilibrium under Perfect Competition
- In the long run, the firm earns normal profit or exits the industry.
- The industry is in equilibrium when all firms earn normal profit.
Perfect Competition and Economic Efficiency
- Perfect competition leads to economic efficiency, which has two aspects:
- Technical efficiency (producing at the lowest point of the average cost curve)
- Allocative efficiency (producing at the level where price equals marginal cost)
Perfect Competition and the Internet
- The Internet has reduced market imperfections and increased competition by:
- Providing wider choice to consumers
- Allowing for easier price comparisons
- Reducing transaction costs
- Reducing the minimum efficient scale of firms
Characteristics of Perfect Competition
- Perfect competition is a market structure where individual firms have no influence over the market price.
- Firms are price takers, meaning they cannot influence the price of a good or service.
- The following conditions are necessary for perfect competition:
- Large number of small sellers and buyers
- Perfect substitutes (homogeneous products)
- Perfect knowledge (all producers and consumers are aware of the market price)
- Perfect mobility (free entry and exit of firms)
- No collusion (independent action among buyers and sellers)
- No external influence (government or other groups)
Difficulties in Satisfying the Assumptions of Perfect Competition
- In reality, it is difficult to achieve perfect competition due to:
- Imperfect knowledge
- Barriers to entry and exit
- Differentiation of products
- Imperfect mobility
- Collusion among firms
Relevance of the Perfectly Competitive Model
- Despite its limitations, the perfectly competitive model is useful as a benchmark for evaluating the competitiveness of real-world markets.
- It serves as an ideal or standard for judging the performance of firms in more typical market structures.
Industries Close to Perfect Competition
- Examples of industries that approximate perfect competition:
- Foreign exchange markets
- Stock markets
- Commodity markets (e.g. copper, tin, corn, coffee, tea)
- Electronic marketplaces (e.g. Amazon)
Output Decisions under Perfect Competition
- The individual firm in a perfectly competitive market:
- Is a price taker
- Has a perfectly elastic demand curve
- Maximizes profit by producing where marginal revenue equals marginal cost
- May earn supernormal profit or make a loss in the short run
Deriving the Perfectly Competitive Firm's Supply Curve
- The firm's short-run supply curve is the portion of the marginal cost curve above the average variable cost curve.
- The firm's long-run supply curve is the marginal cost curve above the minimum long-run average total cost curve.
Long-Run Equilibrium under Perfect Competition
- In the long run, the firm earns normal profit or exits the industry.
- The industry is in equilibrium when all firms earn normal profit.
Perfect Competition and Economic Efficiency
- Perfect competition leads to economic efficiency, which has two aspects:
- Technical efficiency (producing at the lowest point of the average cost curve)
- Allocative efficiency (producing at the level where price equals marginal cost)
Perfect Competition and the Internet
- The Internet has reduced market imperfections and increased competition by:
- Providing wider choice to consumers
- Allowing for easier price comparisons
- Reducing transaction costs
- Reducing the minimum efficient scale of firms
This quiz covers the conditions and characteristics that define perfect competition, including the role of firms as price takers and the impact of large numbers of small sellers and buyers.
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