Characteristics of a perfectly competitive market structure
Many buyers and sellers (infinite)
Intense competition
Firms sell homogeneous goods/services
Firms are price takers
No barriers to entry and exit
Perfect information of market conditions
Price takers
Firms have no ability to set their own prices, they have to charge the market price
If a firm tries to raise price above market price, they will lose all demand. If they reduce price, they will lose revenue and profit without gaining anything
Firms in perfect competition are profit maximisers, producing where MC=MR
Long run equilibrium in perfect competition
When normal profit is being made, there is no tendency for the market to change
Supernormal profit in perfect competition
1. Attracts new firms to enter the market
2. Increases supply, driving down price
3. Until normal profit is left
Subnormal profit in perfect competition
1. Incentivises firms to leave the market
2. Decreases supply, driving up price
3. Until normal profit is left
Perfect competition
Achieves allocative efficiency (price=MC)
Achieves productive efficiency (producing at minimum of AC)
Achieves X-efficiency (minimising waste and costs)
Does not achieve dynamic efficiency (lack of profit to reinvest in innovation)
In the long run, there is no supernormal profit in perfect competition, so firms cannot be dynamically efficient
