perfect competition

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4 Terms

1
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characteristics

  • many buyers+sellers

  • homogenous products

  • perfect information

  • low barriers to entry/exit

  • profit maximising firms

2
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supernormal profits in short run

  • supernormal profits attract new firms in the market due to low barriers of entry + perfect information

  • supply shifts out until there are no longer supernormal profits

  • no new firms enter market at normal profit

<ul><li><p>supernormal profits attract new firms in the market due to low barriers of entry + perfect information</p></li><li><p>supply shifts out until there are no longer supernormal profits</p></li><li><p>no new firms enter market at normal profit</p></li></ul><p></p>
3
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subnormal profit

  • no incentive to stay in the market so firms leave due to low barriers of exit

  • supply shifts inwards which increases price till existing firms have normal profits

<ul><li><p>no incentive to stay in the market so firms leave due to low barriers of exit</p></li><li><p>supply shifts inwards which increases price till existing firms have normal profits</p></li></ul><p></p>
4
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conslusion

  • Allocatively efficient

  • productively efficient

  • X efficient

  • dynamically INefficient

  • statically efficient

  • shut down condition = AR = AVC

  • break even condition AR = AC

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