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Market Structures

Perfect competition: Efficiency of perfectly competitive markets

  • 3 things to know
  • A2 Units 3 and 4

Overview

Recall questions on The efficiency of perfectly competitive markets.

What you need to know

Answer each one before you reveal it.

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Key term

What happens in a perfectly competitive industry where firms are making losses?

Key term

State the full long-run equilibrium condition for a firm in perfect competition.

Key term

Give three reasons why perfect competition is rarely, if ever, found in real markets.

Questions from this subtopic

Each one with the model answer underneath.

  1. 1

    What happens in a perfectly competitive industry where firms are making losses?

    Model answer

    Firms leave the industry, market supply falls, and the price rises until the remaining firms once again earn normal profit.

  2. 2

    State the full long-run equilibrium condition for a firm in perfect competition.

    Model answer

    Price equals marginal revenue, equals marginal cost, and equals the minimum of average cost.

  3. 3

    How much profit does a perfectly competitive firm earn in long-run equilibrium?

    Model answer

    Normal profit only, because freedom of entry and exit removes both supernormal profit and losses.

  4. 4

    Why is a perfectly competitive industry productively efficient in the long run?

    Model answer

    Entry drives the price down until each firm is forced to produce at the lowest point of its average cost curve, so output is made at the minimum possible cost per unit.

  5. 5

    Why is perfect competition allocatively efficient?

    Model answer

    Because the firm produces where price equals marginal cost, so the value consumers place on the last unit exactly equals the cost of producing it.

  6. 6

    Is a perfectly competitive firm allocatively efficient in the short run as well as the long run?

    Model answer

    Yes, because profit maximisation always sets marginal cost equal to marginal revenue, and marginal revenue equals price at every level of output.

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AThe demand curve shifts to the left.
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CPrice falls until a new equilibrium is reached.

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