3.4.2 Perfect competition

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

• Many small firms in market

• homogenous product (sell same product, same place, no branding, EXACTLY - perfect substitutes)

• Perfect knowledge for both consumer & producer (everyone knows everything equally about the market)

• Freedom of entry & exit in market since no regulation, low sunk costs as no advertisement needed

• price taker (this is because all firms sell the exact same good, no competition - so can’t determine price of good)

• Profit maximisation

Revenue in perfect competition

Supernormal profits in short run & long run for perfect competition

How to calculate (profit) loss per unit from the graph

Profit = Revenue - Cost

Profit loss per unit = Revenue per unit - cost per unit

1) Revenue = p x q

2) Therefore, revenue per unit = price

3) Cost per unit = TC/Q = AC

Therefore, profit loss per unit = AC - P

How to calculate profit per unit from the graph

P - AC

Shutdown point - see tutoring notes

• Long run shutdown condition:

  • AR less then AC

• Short run

  • AR less than AVC → shutdown

  • AR more than AVC (but less than AC) → carry on

Advantages of perfect competition

• high competition → lower price for consumers → consumer surplus increases

• supernormal profit in short run

• AE in both SR & LR

• productive efficiency in LR

• Perfect competition have competition → achieve X-inefficiency

• Low sunk cost → decrease waste of money → X-efficiency

Disadvantages of perfect competition

• productive efficiency in SR only

• No supernormal profit in LR - no dynamic

• No economies of scale due to small firms