perfect competition

• Perfect competition


  A theoretical extreme market structure, not realistic, but used as a benchmark to assess the efficiency of real-world market structures
• 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
• Profit maximisation


  Firms produce where MC = MR
• Long-run equilibrium in perfect competition

  Normal profit is being made, no tendency for the market to change
• Supernormal profit in the short run

  1. Attract new firms to enter

  2. Supply shifts right

  3. Price falls

  4. Until normal profit remains
• Subnormal profit in the short run

  1. Firms incentivised to leave the market

  2. Supply shifts left

  3. Price rises

  4. Until normal profit remains
• Efficiency in perfect competition

  • Allocative efficiency (price = MC)
  • Productive efficiency (operating at lowest point of AC)
  • X-efficiency (minimising waste and costs)
  • Not dynamically efficient (lack of supernormal profit to reinvest)