Perfect Competition

• Perfect competition - a market structure where all consumers have access to the same amount of goods and information

  eg. agriculture, supermarket
• Perfect competition characteristics:

  • infinite buys + sellers
  • homogenous goods (identical)
  • firms are price takers (set from the market)
  • no barriers to entry/exit of market
  • perfect information
• Perfect competition firms produce short run supernormal profits, however do not produce long run supernormal profits.
• Economically efficient - allocative, productive X efficient
• Each firm is a price taker as goods are perfectly homogenous and there is perfect information - demand is perfectly elastic
• Pros:

  • Perfect information
  • no barriers to entry
  • only normal profits in LR therefore no consumer exploitation
  • maximum consumer and economic welfare
  • economic efficiency
• Cons:

  • Normal profits, therefore no dynamic efficiency
  • In LR firms can benefit from EoS, but in the diagram its ignored
• Shut down Condition (AR = AVC) - firms will evaluate their profits/ costs to decide whether to leave the market
• Shut down condition: EVAL

  • If firms are breaking even, firms may decide to stay in the market as they're loyal to their customers, and may not want to make their work force redundant
• Breakeven condition (AR = AC) - working out what type of profit is made by the firm