Unit 3- Perfect Comp

• Characteristics of perfect competition

  • Numerous buyers and sellers
  • Perfect information of prices
  • No barriers to entry and exit
  • Homogenous products
  • Profit maximisation is the objective
  • Price takers
  • Perfectly elastic demand curve
• Why are firms price takers?

  They have no market power due to similar products, thus they are unable to influence prices
• What happens in the short-run?

  Firms make supernormal profits/losses
• What is included in the diagrams?

  • MC
  • AC/LRAC: Supply curve
  • AR=MR: Demand curve
  • Supply and Demand classic diagram
• Where does supernormal profit occur, and what is overall profit?

  • (P1-C1) x Q1
  • AR > AC
• Where does supernormal loss occur, and what is overall loss?

  • Same as profit
  • AR < AC
• Why does the PROFIT market shift in LR?

  • new entrants are attracted by supernormal profit
  • Supply increases, Quantity increases and thus price falls
  • After a while, they make normal profit
• Why does the LOSS market shift in the LR?

  • Firms leave the industry
  • Supply decreases (shifts to left)
  • Quantity falls
  • Price rises
• Why is the demand curve horizontal?

  All of the products are perfectly elastic due to lack of differentiated substitutes ( homogenous)