Perfect Competition

• Characteristics

  • Many buyers and sellers
  • Sellers are price takers
  • Free market entry and exit
  • Perfect knowledge
  • Homogenous goods
  • Firms are short-run profit maximisers
  • FoP perfectly mobile
  • No collusion
• Can supernormal profit / loss occur in both the long run and short run?

  No
• Can normal profit occur in both the long run and short run?

  Yes
• What is required for profit maximisation

  MC = MR
• What represents profit/loss per unit

  Distance between AR and AC
• Benefits of perfect competition

  • MC = P (firms are allocatively efficient)
  • AC minimised (firms are productively efficient)
  • Consumer welfare is maximised at lowest unit cost possible
• P<MC results in a social loss (reduction in welfare) so it isn't worth producing beyond P=MC , P>MC results in increased welfare from each extra unit so it is worth increasing production to P=MC
• What is the condition for supernormal profit

  AR > AC
• Allocative Efficiency


  When resources are allocated in such a way that society's welfare is maximised