perfectly competitive market

assumptions

• very small and many firms

• homogeneous goods

• low to no barriers to entry

• price taker

• perfect degree of competition

• perfect information btwn consumers and producers

abnormal profit SR

• in sr, firms may make abnormal profit

• ar > ac

• if this is the case, more firms will start to enter the industry and eventually the industry supply curve will shift to the right, prices will fall, firms will make normal profit in the long run

normal profit SR

• ar=ac

• if more firms enter the market, due to perfect knowledge assumption of abnormal profit in the industry, supply increases further, leading to further fall in price

loss SR

• ac > ar

• in sr, firms may make a loss

• if that is the case, firms will start to leave the market/industry, and eventually the supply curve of the industry will shift to the left, price will increase, and firms will enjoy normal profit in the long run

allocative efficiency

• P=MC

• P > MC, underallocation

• P < MC, overallocation

pros of pcm

• allocative efficiency

• low price for consumers

• responds to consumers stastes

• competition leads to closing down of inefficient producers

cons

• unrealistic assumptiuons

• lack of product variety

• cant take advantage of economies of scale

• limited ability to engage in new product development