Podcast
Questions and Answers
How can the entry/exit situation for a firm in a perfectly competitive market be described?
How can the entry/exit situation for a firm in a perfectly competitive market be described?
- It is difficult for firms to enter into the market
- Firms cannot enter into the market
- Firms can easily enter into the market. There is no barriers to entry. (correct)
- Only some firms can enter into the market.
How can all goods in a perfectly competitive market be described?
How can all goods in a perfectly competitive market be described?
- Different
- cheap
- expensive
- Homogenous (correct)
Which of the following statements is true relating to perfect competition?
Which of the following statements is true relating to perfect competition?
- There is perfect knowledge within the industry
- There are many sellers and sellers are price takers not price setters
- firms aim for profit maximisation
- all of the above (correct)
What is the primary purpose of competitive advertising?
What is the primary purpose of competitive advertising?
Why is generic advertising common in perfectly competitive markets?
Why is generic advertising common in perfectly competitive markets?
What is a disadvantage of perfectly competitive markets?
What is a disadvantage of perfectly competitive markets?
In a perfectly competitive market, what is the effect on prices compared to a monopoly?
In a perfectly competitive market, what is the effect on prices compared to a monopoly?
What can be said about the production of firms in a perfectly competitive market?
What can be said about the production of firms in a perfectly competitive market?
What is a characteristic of firms in a perfectly competitive market?
What is a characteristic of firms in a perfectly competitive market?
Why do individual sellers in a perfectly competitive market not have the potential to expand?
Why do individual sellers in a perfectly competitive market not have the potential to expand?
What is a risk faced by firms in a perfectly competitive market?
What is a risk faced by firms in a perfectly competitive market?
What is a consequence of the lack of variety in perfectly competitive markets?
What is a consequence of the lack of variety in perfectly competitive markets?
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Study Notes
Types of Advertising
- Competitive Advertising promotes the qualities/features of one firm's goods over those of its competitors.
- Generic Advertising promotes the qualities/features of all the output of an industry without identifying individual suppliers.
Competitive Advertising in Perfectly Competitive Markets
- Not used in perfectly competitive markets due to:
- Buyers already having a high degree of knowledge of both price and quality.
- Sellers selling identical products, benefiting all firms in the market.
- Increased advertising costs would reduce profits.
Advantages of Perfectly Competitive Markets
- Buyers have many sellers to choose from.
- Prices are lower than they would be with a single firm.
- Firms earn normal profit in the long run, preventing exploitation of consumers.
- Overall market quantity supplied is higher.
- Individual firms are efficient, producing at the lowest point on the AC curve.
Disadvantages of Perfectly Competitive Markets
- Lack of variety for consumers due to homogenous goods.
- Individual sellers cannot expand or benefit from economies of scale.
- Firms only make normal profit, risking business failure.
- No incentive for individual sellers to innovate.
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