3.4.2 Perfect competition & 3.4.3 Monopolistic competition

Different types of markets

Characteristics of perfect competition (perfect competition is the idealised market model to compare but impossible to happen in real life lol)

• Number of firms: many small sellers & buyers (near infinite) (all firms equally small in size)

• Type of product: homogenous product (all firms produce the same product - perfect substitutes)

• Knowledge: Perfect knowledge (everyone knows everything equally about the market)

• Barriers to entry/exit: No, costless

• Price-setting ability: None, price taker (this is because all firms sell the exact same good - so can’t determine price of good)

• Objective: Profit maximisation

Revenue in perfect competition

Supernormal profits in short run & long run for perfect competition

Short run:

• Supernormal profit only happens in short-run, in long run, no supernormal profit only normal profit

• This is because:

  • In short run, supernormal profit attracts new firms to industry → MR decrease (=AR=D=P) → this MR straight line continue to shift down as more firms enter due to no barriers to entry → shift down until land on normal profit so no supernormal profit anymore → stay there because no firms want to enter industry anymore as they see no profit

• Therefore, in long run, firms are productively & allocatively efficient (as there is no profit max. ) but not dynamically efficient (no supernormal profit)

Profit maximizing equilibrium in the short run & long run