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State the assumptions of perfect competition. How does a perfectly competitive industry work in the short run and the long run? What makes perfect competition efficient?

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Introduction

State the assumptions of perfect competition. How does a perfectly competitive industry work in the short run and the long run? What makes perfect competition efficient? Assumptions behind a Perfectly Competitive Market In a perfectly competitive market it is assumes that there is a large number of small firms that all produce a homogeneous product. Firms in this market are all price-takers, where they use the selling price that it set by the price equilibrium. A perfectly competitive market also has no barriers to entry or exit; there is also perfect knowledge within the market. A perfectly competitive market must contain four characteristics in order to be perfectly competitive. These four are better described as: * There must be many buyers and sellers in the market however none of these should be able to influence the price. A perfectly competitive market usually has a small number of firms that supply to a small number of buyers. ...read more.

Middle

The firms in the industry including existing established firms and new entrants are to have no advantage over one another in terms of technology etc. In order to find out how a firm works in the short run and long run in a perfectly competitive industry we have to look at certain factors, such as the profit maximising output of a firm, the profit and losses in the short term, the short run supply curve of a firm and the long run adjustments. By looking at these factors we can determine the industries price, output and economic profits. Firstly we will start by looking at the profits and losses in the short run for a firm. In the short run the equilibrium market price is set by the interception between the market demand and the market supply. Therefore in the short run we can determine whether a firm is making an economic loss, profit or breaking even. ...read more.

Conclusion

and market demand (D) interact with one another. The graph below shows how the equilibrium looks if the demand in the industry increases or decreases when the price in the market goes up or down. In the long run different factors affect the performance of the industry, there are two ways in which the industry changes. These changes are the entry and exit of firms in the industry and the changes in plant size for firms. Entry and exit of firms in an industry depend mainly on the economic performance of the firms, if a firm is suffering from economic losses that are not temporary will leave the industry in order to prevent losing profits. However if an entrepreneur sees that an industry is doing well and most firms are making an economic profit then they may decide to set up a firm in that industry. The entry and exit of firms in an industry influence the market price and the quantity or products produced. ...read more.

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Response to the question

This essay engages superbly with the question, showing a good progression through understanding and knowledge to analysis. However, the essay neglects the efficiency side of the question, and doesn't discuss why a perfectly competitive market is efficient. I would note ...

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Response to the question

This essay engages superbly with the question, showing a good progression through understanding and knowledge to analysis. However, the essay neglects the efficiency side of the question, and doesn't discuss why a perfectly competitive market is efficient. I would note that often the last question will hold the most marks, so it's crucial you do not lose focus!

Level of analysis

The analysis in this essay is strong. I liked how the characteristics of a perfectly competitive market are clearly laid out and well explained. If I were doing this essay, I would've added a comment saying that in practice no market is perfectly competitive. It just shows extra evaluative skills and understanding that the concept is a model. When talking about market structures, I would always define what marginal cost, average cost, etc are. It's as simple as saying "marginal cost is the extra cost occurred by producing another unit of output" but it ensures the understanding is clear. I would also add that when talking about normal profit in economics, it includes the cost of the entrepreneur to remain in the market. This is not to be confused with profits in day to day discussion which is revenue minus costs. Where average revenue is greater than average costs, this is abnormal profit. The use of the graphs is particularly strong, and the diagrammatical analysis allows for high marks. If I were answering this essay, I would progress where the essay ends to say that a perfectly competitive market is allocatively and productively efficient. A short definition of both and an explanation would suffice.

Quality of writing

This essay is structured well, following the subheadings clearly. I liked how the introduction summarises a perfectly competitive market concisely. The style is strong, and allows for a convincing argument. Although a bibliography is often not required, it was nice to see a recognition of where information was collected from. Spelling, punctuation and grammar are strong throughout!


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Reviewed by groat 26/02/2012

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