Question

A. Discuss the characteristics of perfect competition.

B. Explain why a fast food restaurant often displays characteristics of perfect competition.

C. Describe how your restaurant would maximize its short-run profits.

D. Discuss why a firm in perfect competition may choose to be open on Mondays, typically the slowest day of the week, when their revenues do not seem to be sufficient to warrant doing so.

E. Discuss the long-run benefits of running a firm in perfect competition.

Answer 1

Perfect competition is that type of market structure which leads to Pareto-efficient allocation of economic resources.

its characteristics are as follows-

1. large numbers of buyers and sellers- there are a large number of buyer and sellers due to which seller is price-taker rather than price-maker.

2. homogeneous products- each company produces a similar type of products hence, every good is a perfect substitute for another good.

3. product information- both buyer and seller have full and perfect knowledge about product price and it is determined by the market forces. this help in the uniformity of prices of the products or goods.

4. free entry and exit of firms- the firm are free to enter or exit from the market according to their profits and loss respectively.

5. perfect mobility of factors of productions and goods- there should be free mobility in the industry. firms are free to move goods to places where they can get more prices.

6. low cost- in perfect competition transportation cost is low also due to homogeneity of goods advertisement is also low or negligible.

7. independent relation between buyers and sellers - as prices are set by market forces, sellers cannot increase prices because they will loose customers and hence have to accept the prices set by the market.