Perfect Competition | Notes

What are the characteristics of perfect competition?

1. no barriers to entry or exit
2. perfect information
3. identical products
4. firms are price-takers

Perfect competition diagram in the short-run

Efficiencies in the short-run

• not productively efficient because MC≠AC at q1
• allocatively efficient because AR=MC at q1

What happens in the long-run in perfectly competitive markets?

1. existing firms are making supernormal profit.
2. since there is perfect information and no barriers to entry,
3. new firms are attracted to join the market
4. market supply increases
5. each firm has less demand so AR and MR shifts to the left
6. existing firms attempt to profit maximise but now they are only able to make normal profits

Perfect competition diagram in the long-run

Efficiencies in the long-run

• productively efficient because MC=AC at q1
• allocatively efficient because AR=MC at q1
• not dynamically efficient because firms are not making supernormal profit in the long-run

Summary questions

1. what are the characteristics of perfect competition?
2. perfect competition short-run diagram
3. is perfect competition efficient in the short-run
4. what happens in perfect competition in the long-run?
5. perfect competition long-run diagram
6. is perfect competition efficient in the long-run