Perfect competition is a market structure with many small buyers and sellers

Perfect competition is an ideal type of market structure where all producers and consumers have full and symmetric information and no transaction costs.

Key features of a perfect competition

1. many small buyers and sellers

2. no barriers to entry or exit (no economies of scale, no patents, no sunk costs)

3. homogeneous goods (all goods must be the same)

4. perfect information

Perfectly Elastic Demand

Elastic demand is when PED is between:  negative 1 and negative infinity

PED = - ifinity demand is perfectly elastic

Market and Firm

• market diagram Quantity is in millions

• firms quantity is measured in the 10s

FIRM

perfectly competitive firm will have a perfectly elastic demand curve. these firms are also known as PRICE TAKERS

demand = average revenue = marginal revenue

Short Run & Long Run Equilibrium

in the short run

Explain how a perfectly competitive market moves to its long run equilibrium

In the long run, perfect information means potential sellers outside the market will see the opportunity to make supernormal profit by entering the market.

There are no barriers to entry, so new firms will enter the market, increasing supply and decreasing price until AR touches the bottom of the firm’s AC and all the supernormal profit is gone.

New firms will no longer enter the market because they can no longer make supernormal profit, so we have reached the long run equilibrium.

in the long run only normal rofit can be made in the per

Firms are incentivised by supernormal profit to enter the market. There are no barriers to entry so they can easily enter the market. This increases supply from S to S1. This decreases price from Pe to P1, so price = lowest point along AC and all supernormal profit has been competed away. Only normal profit can be made in the long run.

Short Run Loss

with an equilibrium price as low as £1 firms will make a loss of GTVPeIf firms are making a short run loss, they will leave the market and this is easy to do because there is no barriers to exit.

As firms leave the market, supply decrease and prices will increase back up, until normal profit can be made.

At this point, firms will be covering their opportunity cost - so they’ll no reason to leave the market anymore. Which means we’ve reached our long run equilibrium - where firms are making normal profit!