IB Economics REvision-Perfect Competition

What is market power in the context of economics?

• A firm's ability to influence and control market conditions, including price and output.

• A firm's ability to produce goods at a lower cost than competitors.

• A firm's ability to innovate and create new products.

• A firm's ability to merge with other firms to increase market share.

In perfect competition, what happens when firms earn abnormal profits in the short run?

• New entrants are attracted, shifting the industry supply curve to the right and eliminating these profits.

• Firms increase their prices to maximize profits.

• Firms exit the market, reducing competition.

• The government intervenes to regulate prices.

What characterizes a perfectly competitive market?

• A large number of buyers and sellers with firms acting as price takers.

• A few dominant firms controlling the market.

• High barriers to entry and exit.

• Significant product differentiation among firms.

What ensures allocative efficiency in a perfectly competitive market?

• Average revenue equals marginal cost (AR=MC).

• Marginal cost equals average cost (MC=AC).

• Firms earn abnormal profits.

• High industry concentration ratio.

Why is perfect competition considered an idealized framework?

• It provides a useful model for understanding economic dynamics despite rarely occurring in real-world markets.

• It accurately represents most real-world markets.

• It allows firms to have significant market power.

• It encourages high profit margins and innovation.