Perfect competition

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  • Created by: Deborah
  • Created on: 28-02-16 12:48
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  • Perfect Competition
    • Conditions
      • 1. Large no. of buyers and sellers
      • 2. Perfect information about market- prices of goods and costs of production
      • 3. All firms are price takers
      • 4. HomogenousProducts- identical so firms can only compete on price
      • 5. Freedom of entry and exit to the market- no sunk costs
    • MR is perfectly elastic (horizontal) because consumers will only pay one price for the product.
      • AR and D also horizontal.
      • Firm only makes normal profit in long-run  because it produces where ATC=AR
      • In the short-run profits and losses are possible.
        • MR=AR=D curve is above the AC curve so firm makes super-normal profit.
          • Incentive for more firms to enter the market which increases supply which decreases equilibrium price to long-run position of AC=AR (normal profit)
        • MR=AR=D  curve is below the AC curve so the firm makes sub-normal profit.
          • Firms leave the market which reduces the supply which in turn increases the market equilibrium price to long-run position of AR=AC (normal profit)
    • Efficiency
      • Firm produces on ATC  it is technically efficient and also x-efficient.
      • Produces on lowest point of ATC so is productively efficient.
      • Produces where MC=P (P is price) so is allocatively efficient.
    • Welfare Analysis
      • Consumer Surplus- the difference between what you were willing to pay for a product and what you had to pay. It is the area above the price but below the demand curve.
      • Producer Surplus- area below the price but above the supply curve. Consumer willing to pay higher price than the price  you would be happy to sell it at.


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