Notesale: Turn your study into money

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Competitive Markets and perfect competition

Firms operating under conditions of competition will not only need to remain price
competitive but will strive to improve the quality of their product or service to stay ahead
of their competitors
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Large number of buyers and sellers - This is to ensure that the product is
sold and the firm is a price taker; no one firm or individual buyer is large enough to
affect the market price
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Freedom of entrance to and exit from the industry - any firm can enter the industry as
there are no barriers to keep them out
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This means firms will make
normal profits in the long run
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This is the point of productive efficiency - where
the economy can not produce any more of one good without sacrificing production of
another
...
Firms in perfect competition are likely to be statically efficient,
that is, both allocatively and productively at a point in time
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However, a firm in perfect competition may, in the search to
reduce costs, dispose of its waste in ways that create negative externalities and will not
therefore be allocatively efficient

Dynamic efficiency is efficiency over time and concerns the production of new products,
new techniques and new processes, and for firms to undertake the investment in
research and development they need to make supernormal profits
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The structural performance and conduct model
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The
industry structure (which is assumed to determine the conduct of the industry) includes
such variables as the number and size of buyers and sellers, degree of product

differentiation and the levels of barriers to entry

Conduct refers to the activities of the industries buyers and sellers
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Whilst buyers activities concerns whether any buyers are in a position of power
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The structure of
perfect competition should lead in the long run to the optimal allocation of resources in
the economy where welfare will be maximised
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Action may be required by governments to ensure that other market forms achieve
maximum welfare, in terms of competition policy to ensure that groups of firms are
unable to ‘rig the market’
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