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115 CFA
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115.030.20.02 Economics - Reading 13 - 2. Perfect Competition

2. Perfect Competition

b. explain relationships between price, marginal revenue, marginal cost, economic profit, and the elasticity of demand under each market structure;

c. describe a firm's supply function under each market structure;

d. describe and determine the optimal price and output for firms under each market structure;

e. explain factors affecting long-run equilibrium under each market structure;

What five characteristics create perfect competition?
1. All the firms in the market are producing an identical product (e.g., wheat of the same grade).
2. No barriers limit the entry or exit of firms in the market.
3. A large number of firms exist in the market. Established firms have no advantages over new ones.
4. Sellers don't have market-pricing power.
5. There is no non-price competition.

What two factors causes perfect competition arise?
1. When a firm's minimum efficient scale is small relative to market demand so there is room for many firms in the industry, and
2. When each firm is perceived to produce a good or service that has no unique characteristics, so consumers don't care which firm they buy from.

What is a price taker? What does their demand curve look like?
Price takers can sell all their output at the market price, but they are unable to sell any of their output at a price higher than the market price. That is, a price taker faces a horizontal demand curve. Each firm's output is a perfect substitute for the output of the other firms, so the demand for each firm's output is perfectly elastic.


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  • CFA