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Perfect Competition (Features (Barriers to Entry (1) No barriers to entry …
Perfect Competition
Features
Barriers to Entry
1) No barriers to entry 2) New firms free to enter 3) Existing firms free to leave 4) Resulting in normal profits in the long run
Nature of Product
1) Homogeneous products sold by all firms are identical and perfect substitutes of each other. 2) Quality of products is the same for all firms
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Knowledge of market
1) Perfect knowledge : Consumers know all the information about products and prices. 2) Firms are aware of the best production method. 3) Results in homogeneous products.
Allocative efficiency (P = MC) : achieved when resources are used such that it is not possible to make someone better off without making someone else worse off.
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2) When P>MC, the consumer values the additional unit of good more than the resources required to produce it, resulting in the production of additional unit of the good and causing a net gain in welfare.
3) When P<MC, opportunity cost is greater than the value that consumer places in producing an additional unit of the good and thus society is better off not producing the additional unit.
4) Due to market forces, eventually P =MC, where the last unit of good produced is valued as much as other goods produced using the same resources
Income Equity
1) PC firms tend to spread opportunites and wealth widely due to free entry of firms and normal profits in the long run. 2) Prices are also perfectly competitive. 3) Consumer surplus will be retained by consumers and not exploited by firms as each firm has negligible market power.
Productive efficiency : Achieved when all firms produce along their long run average cost curve at any given output level.
1) Present in PC markets as competition among firms forces them to produce at the lowest cost per unit of output to remain competitive with other firms . 2) This ensures that firms are producing at the optimum capacity and that there are no excess capacity.
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Behavior of firms
1) PC firms are price takers. 2) They are unable to influence the price due to negligible market power. 3) Market price is set by demand and supply interactions. (market forces decide the price)
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