Many buyers and sellers, none of which are large enough to influence prices
No barriers to entry or exit
Buyers and sellers have perfect knowledge of prices
Products are homogenous
Firms are profit maximisers
Perfect competition
Firms are profit maximisers
Firms produce where MC = MR
Demand (AR) curve is above the total cost curve at the profit maximising point
Firm is making supernormal profits in the short-run
Because there are no barriers to entry, more firms will then enter this market
More firms entering the market
Increases supply, resulting in the individual firms only making normal profit
A firm in a perfectly competitive market is making a loss
Firms will exit the market easily as there are no barriers to exit, supply will shift to the left and the firms remaining will make normal profit again
In the long run, perfect competition ensures that firms make only normal profits (not supernormal or losses)
This is because average costs will be equal to average revenue
