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Questions and Answers
Define perfect competition in economics.
Perfect competition is defined by several idealizing conditions, collectively called perfect competition, or atomistic competition, in which a market is characterized by a large number of small firms, identical products, freedom of entry and exit, perfect information, and perfect mobility of resources.
What are the conditions necessary for a market to be considered a perfect market?
The conditions necessary for a market to be considered a perfect market include a large number of small firms, identical products, freedom of entry and exit, perfect information, and perfect mobility of resources.
What is the significance of perfect competition in terms of allocative efficiency and productive efficiency?
Perfect competition provides both allocative efficiency and productive efficiency. Such markets are allocatively efficient, as output will always occur where marginal cost is equal to average revenue (MC = AR). In addition, any profit-maximizing producer in perfect competition faces a market price equal to its marginal cost (P = MC).
In what way are perfectly competitive markets not necessarily productively efficient in the short run?
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Why does a monopoly not have a supply curve?
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Study Notes
Perfect Competition
- A market structure in which there are many firms producing a homogeneous product, and no single firm has the power to influence the market price
- Firms in a perfectly competitive market are price-takers, not price-makers
Conditions for a Perfect Market
- Many buyers and sellers, each with no influence over the market price
- Homogeneous product, making each firm's product a perfect substitute for another's
- Free entry and exit of firms into the market
- Perfect information about the product and prices among all market participants
- No externalities or government intervention
Significance of Perfect Competition
- Allocative efficiency: Resources are allocated in a way that maximizes consumer satisfaction, as firms produce the quantity that equates marginal cost with marginal revenue
- Productive efficiency: Firms produce at the lowest possible average cost, as they are incentivized to minimize production costs to stay competitive
Limitations of Perfect Competition
- In the short run, firms may not be productively efficient, as they may not have the time to adjust to changes in demand or production costs
- Firms may not be operating at the lowest possible average cost, as they focus on maximizing profits in the short term
Monopoly and Supply Curve
- A monopoly does not have a supply curve because it is the only firm in the market, allowing it to influence the market price
- A monopoly sets the price and quantity of the product, making it a price-maker, not a price-taker
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Description
Test your knowledge of perfect competition and general equilibrium theory in economics with this quiz. Explore the idealizing conditions and characteristics of a perfect market, and learn about the equilibrium outcomes in theoretical models.
