Perfect Competition

Perfect Competition

A market structure with many small firms selling identical products with perfect information and free entry and exit

Price Taker

A firm that must accept the market price because it cannot influence price

Homogeneous Product

A product that is identical across all firms so consumers see no difference

Free Entry and Exit

Firms can enter or exit the market without barriers

Perfect Information

Buyers and sellers have full knowledge of prices and products

Firm’s Demand Curve

Perfectly elastic (horizontal) at the market price in perfect competition

Market Demand Curve

Downward sloping

Total Revenue (TR)

Price multiplied by quantity sold

Marginal Revenue (MR)

Additional revenue from selling one more unit of output (MR = P in perfect competition)

Average Revenue (AR)

Revenue per unit sold

Profit Maximisation

Occurs where marginal revenue equals marginal cost (MR = MC)

Shutdown Rule

A firm should shut down in the short run if price is below minimum AVC

Short-Run Supply Curve

The portion of the marginal cost curve above minimum AVC

Economic Profit (Short Run)

Occurs when price is greater than ATC

Break-Even

Occurs when price equals ATC and economic profit is zero

Operating at a Loss

When ATC > price > AVC

Shutdown Condition

When price is below AVC

Long-Run Entry

When firms earn profit

Long-Run Exit

When firms incur losses

Long-Run Equilibrium

Occurs where price equals MC and minimum ATC

Zero Economic Profit

A situation where total revenue covers all explicit and implicit costs (normal profit)

Allocative Efficiency

Achieved when price equals marginal cost (P = MC)

Productive Efficiency

Achieved when firms produce at minimum average total cost

Pareto Efficiency

No consumer or producer can be made better off without making someone else worse off

Effect of Entry

Entry shifts market supply right and drives economic profit to zero

Effect of Exit

Exit shifts market supply left and eliminates losses

Firm vs Industry Demand

Firm demand is perfectly elastic

Revenue in Perfect Competition

Increases proportionally with output since MR = P

Conditions for Perfect Competition

Many firms

Long-Run Price

Equals minimum ATC due to entry and exit pressures