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Page 1 Theory of the Firm Perfect Competition Page 2 Theory of the Firm Perfect Competition Perfect competition Perfect competition is a theoretical market structure that will give the optimum allocation of resources. There are four conditions that have to be fulfilled for perfect competition to exist in an industry Page 3 Theory of the Firm Perfect Competition Perfect competition Perfect competition is a theoretical market structure that will give the optimum allocation of resources. There are four conditions that have to be fulfilled for perfect competition to exist in an industry Conditions • There must be many buyers and sellers and none of them can be large enough to have any influence over the market price • There must be perfect knowledge of the market (this means no advertising is necessary) • There must be no barriers to entry - firms must have complete freedom of entry and exit • The goods being sold must be homogenous in nature Page 4 Theory of the Firm Perfect Competition Perfect competition Perfect competition is a theoretical market structure that will give the optimum allocation of resources. There are four conditions that have to be fulfilled for perfect competition to exist in an industry Conditions • There must be many buyers and sellers and none of them can be large enough to have any influence over the market price • There must be perfect knowledge of the market (this means no advertising is necessary) • There must be no barriers to entry - firms must have complete freedom of entry and exit • The goods being sold must be homogenous in nature Copyright © 2015 Active Education peped.org/economicinvestigations • If these conditions are met, then the industry is in perfect competition. Page 5 Theory of the Firm Perfect Competition Perfect competition Perfect competition is a theoretical market structure that will give the optimum allocation of resources. There are four conditions that have to be fulfilled for perfect competition to exist in an industry Conditions • There must be many buyers and sellers and none of them can be large enough to have any influence over the market price • There must be perfect knowledge of the market (this means no advertising is necessary) • There must be no barriers to entry - firms must have complete freedom of entry and exit • The goods being sold must be homogenous in nature Copyright © 2015 Active Education peped.org/economicinvestigations • If these conditions are met, then the industry is in perfect competition.Read More
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FAQs on PPT - The Theory of the Firm under Perfect Competition - Economics Class 11 - Commerce
| 1. What is the theory of the firm under perfect competition? |  |
Ans. The theory of the firm under perfect competition suggests that in a perfectly competitive market, firms are price takers and have no control over the market price. They are assumed to be profit-maximizers and operate at the point where marginal cost equals marginal revenue.
| 2. How does perfect competition affect the behavior of firms? | |
Ans. Perfect competition affects the behavior of firms by limiting their ability to influence the market price. Firms in perfect competition have no market power and must accept the prevailing market price. They focus on minimizing costs and maximizing efficiency to compete effectively.
| 3. What are the characteristics of a firm operating under perfect competition? | |
Ans. A firm operating under perfect competition exhibits several characteristics, including a large number of buyers and sellers, homogenous products, perfect information, free entry and exit from the market, and price-taking behavior. These characteristics ensure that no individual firm can influence the market price.
| 4. How does perfect competition benefit consumers? | |
Ans. Perfect competition benefits consumers by ensuring that goods and services are offered at the lowest possible price. In a perfectly competitive market, firms compete solely on price and efficiency, leading to optimal allocation of resources and consumer welfare. Consumers have access to a wide range of choices and can easily switch between sellers.
| 5. What are the limitations of the theory of the firm under perfect competition? | |
Ans. The theory of the firm under perfect competition has some limitations. It assumes perfect information, which may not reflect reality. In addition, it overlooks the possibility of externalities, market power, and economies of scale. Real-world markets often deviate from perfect competition, and the theory may not fully capture the complexities of market dynamics.
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