4.1.5.3 ~ Perfect Competition

• Short run perfect competition:

  • One firm has no price making power so is a price taker > homogenous product > customers have perfect knowledge

  • If they try to raise the price the consumer will buy alternatives due to perfect knowledge

  • AR curve is same as MR curve as price remains constant (perfectly elastic) because homogenous products and perfect knowledge

  
• Long run perfect competition:

  • Abnormal profit exists in SR, attracts new entrants, firms enter (PC characteristics enabling this)

  • S1 - S2 - new equilibrium industry > price takers > new industry price p2 for all new firms > new AR/MR/D curve > new MC=MR > recalculate profit AC=AR

  • New normal profit > no incentive for firms to enter as they all know that abnormal profit has been eroded due to perfect knowledge
• SR & LR efficiencies:

  SR LR

  Productive no yes

  Allocative yes yes

  Dynamic no (N/A) no

  X-efficient yes yes