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Perfect Competition
Explain the concept of being a ‘price taker’ | This means that the individual firm must accept the price as it is set on the market. Each firm supplies such a tiny fraction of the market it cannot influence the market price. |
What are the characteristics of perfect competition | No barriers to entry – Firms can enter and leave the industry as and when they chose. A large number of buyers and sellers – Cannot practice price discrimination. Each firm controls too little market share to be able to influence the market price. |
Reason for the shape of the demand curve of an individual firm in perfect competition | A firm in perfect competition is a price taker / it accepts the market price. If a firm increases price, quantity demanded will fall to zero as consumers switch to the cheaper identical goods available. |
Impact which the entry of new firms would have on the market and on the equilibrium position of the firm | Their entry cause the market supply curve to shift to the right. This drives down the market price from P1 to P2. Since each firm is a price taker , it must now charge P2. |
Advantages of Perfect Competition | Low prices The firm sells its products at the lowest possible prices. Efficient The firm produces at the lowest point of average costs so there is no waste of scarce resources. |
Disadvantages of Perfect Competition |