Perfect competition

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Last updated 1:59 PM on 10/6/26
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6 Terms

1
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Assumptions of perfect competition



  • Identical (homogenous) products

  • Perfectly elastic demand

  • Many buyers and sellers 

  • No barriers to entry


<p></p><ul><li><p><span style="background-color: transparent;">Identical (homogenous) products</span></p></li><li><p><span style="background-color: transparent;">Perfectly elastic demand</span></p></li><li><p><span style="background-color: transparent;">Many buyers and sellers&nbsp;</span></p></li><li><p><span style="background-color: transparent;">No barriers to entry</span></p></li></ul><p></p>
2
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Supernormal → normal profit in long run


3
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Supernormal → normal profit in long run

  1. Firms in perfectly competitive market may earn supernormal profit (AR > AC) at profit maximising level of output (MR = MC)

  2. Firms have profit incentive to join (as other firms are earning supernormal), and there are no barriers to entry

  3. Supply shifts outwards, market price drops

  4. Firms in perfectly competitive market are price takers(due to perfectly elastic demand), lower price


<ol><li><p>Firms in perfectly competitive market may earn supernormal profit (AR &gt; AC) at profit maximising level of output (MR = MC)</p></li><li><p>Firms have profit incentive to join (as other firms are earning supernormal), and there are no barriers to entry</p></li><li><p>Supply shifts outwards, market price drops</p></li><li><p>Firms in perfectly competitive market are price takers(due to perfectly elastic demand), lower price </p></li></ol><p></p>
4
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Subnormal loss → normal profit in long run

  1. Firms in perfectly competitive market may earn lose profit (AR < AC) at profit maximising level of output (MR = MC)

  2. Firms have no profit incentive to stay(as other firms are losing profit), and there are no barriers to exit

  3. Supply shifts inwards, market price rises

  4. Firms in perfectly competitive market are price takers(due to perfectly elastic demand), raise price


<ol><li><p>Firms in perfectly competitive market may earn lose profit (AR &lt; AC) at profit maximising level of output (MR = MC)</p></li><li><p>Firms have no profit incentive to stay(as other firms are losing profit), and there are no barriers to exit</p></li><li><p>Supply shifts inwards, market price rises</p></li><li><p>Firms in perfectly competitive market are price takers(due to perfectly elastic demand), raise price </p></li></ol><p></p>
5
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Efficiencies in short run

  • Not allocative efficiency

  • Not productive efficiency


6
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Efficiencies in the long run

  • Allocative efficiency

  • productive efficiency