3.4.2 - perfect competition

4 characteristics of perfect competition

many buyers + sellers
—> sellers are price takers

no barriers to entry or exit

buyers and sellers have perfect knowledge of prices

homogeneous products
—> no brand loyalty

show the market diagram and individual firm diagram of a firm in a perfectly competitive market

price is the same at all quantities, so the AR and MR curves are perfectly elastic

profit in short run

can make supernormal profit

profit in long run

only normal profit

• perfect knowledge = firms know that other firms are making supernormal profit

• no barriers = more firms are incentivised to join

• more firms = market supply shifts right

• market price drops

• AR curve moves down

• stops moving when it touches the AC curve at the bottom - normal profit

loss in the short run

if AR is below AC, a firm can be making a loss

loss in the long run

none - still moves to normal profit point:

• firms making a loss bow out of the market (no barriers to exit)

• supply shifts left

• price goes up

• AR goes up

• keeps going up until it reaches breakeven (normal profit)