Perfect Competition - Edexcel Unit 3

Full notes for Perfect Competition Unit 3 A2 Economics Edexcel

HideShow resource information
Preview of Perfect Competition - Edexcel Unit 3

First 190 words of the document:

Harry Bindloss
Perfect competition: Perfect competition is a theoretical market structure. It is primarily
used as a benchmark against which other market structures are compared. The industry that
best reflects perfect competition in real life is the agricultural industry.
Homogenous products - different producers products are identical
Perfect knowledge (consumers and producers are aware of what is being offered to the
Large number of firms in competition with each other.
Large number of buyers
No collusion ­ firms working together
Each firm can sell as much as it wants to produce ­ D=perfectly elastic = AC
Freedom of market entry and exit
Short run supernormal profit only
How the market operates:
Firms are known as price takers. If they offer a price above the market price then
consumers will go to other firms. Firms will not offer a price below the market price, as they
would lose revenue as they can all produce at the going market price. Therefore individual
firms have no influence over market price.

Other pages in this set

Page 2

Preview of page 2

Here's a taster:

Harry Bindloss
Price is falling as other firms are seeing there is profit to be had. Price falls and as AR is
below AC now there is a loss.
When market changes occur (Long Run):
Point of Rest as this is the long term
This is where there is normal profit. This is not a bad thing as wages are still taken into
HOWEVER There is no such thing as a perfect market
Advantages of Perfect Competition
1.…read more

Page 3

Preview of page 3

Here's a taster:

Harry Bindloss
In the short run conditions of perfect competition a firm produces at the profit maximising
output i.e. MR=MC (where MC is rising). In this way the firm is making supernormal profit
because AR > AC. This supernormal profit sends a signal to other potential firms to enter the
market, which they can easily do given no barriers to market entry. This transfers to the long
run position by which the firm is reduced via increased market supply to obtaining normal
profit only.…read more

Page 4

Preview of page 4

Here's a taster:

Harry Bindloss
In the long run a minimum of normal profit is needed to remain in a market for a particular
product. Normal profit occurs when AR = AC. The selling price P2 illustrates this position.…read more


No comments have yet been made

Similar Economics resources:

See all Economics resources »See all resources »