| Are there any examples of Perfectly Competitive Markets?
-What can you deduce from the examples? | -There are no real Markets that are Perfectly Competitive
-But Perfect Competition being a Theory can make it more Easier to see when Markets go Wrong. |
| What conditions must be Satisfied for there to be a Perfectly Competitive Market? | -Infinite Number of Suppliers and Consumers - No single Firm/Consumer has any ‘Market Power’ (affect the Market by themselves) and Each Firm is a ‘Price Taker’ meaning the Market Price is what Firms must deal with
-Perfect Information for Consumers - Well Informed choices are being made ie the Prices that all firms are charging and Details.
-Perfect Information for Producers - No ‘secret low-cost production’ and knows All Prices Charger
-Products are Homogeneous (Identical) - Consumers can Switch products from different Firms
-No Barriers to Entry / Exit - Firms can enter and exit easily
-Firms are Profit Maximisers - all decisions are made to Max Profit - so MC=MR |
| What link does Price Mechanism have with Perfectly Competitive Markets? | -PC Markets allow the Rationing, Signalling and Incentive Function work side by side
-Firms being Price Takers infers that the Price is set by Consumer’s Preference. Resources are thus Rationed and Priorities are Signalled to Producers
-Consumers having Perfect Knowledge and Producers being able to Enter/Exit the Market (Incentives to Intervene more or less?) |
| How can PC Markets lead to Allocative Efficiency? | -In PC Markets, Demand = Marginal Utility because as Quantity Increases, its Worth to Consumers falls.
-PC Markets also have Supply = MC because Law of Diminishing Returns
-Allocative Efficiency happens when the Price is = to What Consumers would Pay for, so, Producers will Supply up to that amount. So P=MU=MC |
| Why can Externalities affect PC Markets? | -Allocative Efficiency occurs P=Marginal Social Cost (Including Externalities.) but in PC Markets it’s also equal to MPC (MC)
-Negative or Positive Externalities, if it followed PC Market logic, would always lead to Over or Under Consumption / Production. |
| Why does Normal Profit exist in PC Markets in the Long Run? | -Firms in a PC Market making a Supernormal Profit will Incentivise - because there is No Barrier to Entry - more Firms into the Market. Firms supplying more leads to the Industry Supplying more leading to, eventually, a Price where there is Normal Profit. That Point will be when the Price = Lowest Point of AC |
| What happens if the Market Price falls below the AC Curve, in a PC Market? | -Firms will be making a Loss - Loosing Revenue in the Indsutry
-In the Long Run they can simply leave, because there are no Barriers to Exit (Supply goes Down and eventually the Price is forced upwards)
-In the Short Run it can have 2 Results: 1 is if AR is still Above AVC then the Firm can still compete for a bit. 2 is if AR is below AVC then the Firm will Exit Straight Away |
| Why can PC Markets lead to Productive Efficiency? | -Productive Efficiency is when the Costs of Production is at the Lowest Point
-Since Firms are Maxing out Profits, it can happen Directly because Firms want to reduce Waste and Inefficiency else it may have to Leave
-So it will lead to Firms producing at the Lowest Level of AC - The Lowest Cost Level possible making it Productive Efficiency |
| What is X-Efficiency? | -How Well a Firm can Lower its Costs down (Organisational Slack)
-Productions Costs can possibly be Reduced at the same Level of Production.
-X-efficiency is Caused by Misusing Factors of Production (Too Much Labour) or by Paying too much (high Wages) |
| Why can Economies of Scale affect Firms being Productive Efficiecnt in a PC Market? | -PC Markets have Infinite Number of Small Firms and can not Exploit Economies of Scale
-If one was to have Economies of Scale then all the other Firms will be less Productive Efficient then then one Big Firm |
| Why can PC fail to reach Dynamic Efficiency? | -Dynamic Efficiency is Efficiency Improving in the Long Run - How Eager Firms are
-This involves Investment and, thus Risk, so only Reward will be the incentive
-In a PC Market, Firm are earning Normal Profit, so there’s not much Reward for taking such risks. This hampers Dynamic Efficiency.
-If there were not fully PC, but towards that side on the Scale, then there can be. Degree of Dynamic Efficiency and Productive Inefficient. THIS is why Real Life Examples are non-existent |
| Why does Static Efficiency occur in PC Markets? | -This happens when Allocative and Productive Efficiency are both Sustained at a Point.
-This isn’t always good and it has to Change. Trucks made before WW2 may have been Static Efficient now, but was Completely Out of Date at the end of WW2 |
| Other than Competing on Price, how else can Firms compete with their Products? | -Improved Products
-Better Service Quality
-Wide Ranges
-Advertising / Promotion
-Better Packaging
-Productions more Accessible and Usable |
| What is the Spectrum of Market Structure? | -It ranges from one side being Perfect Competition - with all the Conditions necessary - to Pure Monopoly - Conditions Competition at all
-Since no Examples of Pure or Perfect Markets exist basically, Real Life Examples lie between the 2 Ends |
| Why would Governments want to Encourage Competition in Markets? | -PC Markets lead to Efficient Long Run Results, which is very nice for Exporting to other Nations and Domestic Demand
-Governments want Firms to Produce Efficiently, Set Fair Prices to Consumers, Innovate and create Wider Ranges and allow New Production Processe |
| What Police’s could the Government do to Encourage Competition in a Market | -Encourage Enterprises with Advise and Subsidies
-Produce better Consumer Knowledge leading to Well-Informed Choices
-More Consumer Choice & Competition in Public Sectors ie Internal Markets (Different parts of the same Organisation compete against each other)
-Privatise & Deregulate Big Monopolistic Nationalised Firms
-Reduce Incentive to Merge and Take-over (Reducing Competition that does)
-More International Competition ie Joining EU which is a Single Market |
