Perfect Competition (AS/A LEVELS/IB/IAL)

Perfect Competition (AS/A LEVELS/IB/IAL)

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Perfect Competition

Perfect competition occurs in markets where there are many small firms and low barriers to entry.

Examples of perfect competition

Newsagents – Local independent newsagents normally sell the same confectionery and newspapers.

Agricultural markets – A farmers market will be selling the same selection of Fruit and Veg.

 

Characteristics of perfect competition

  1. Many small firms
  2. Low barriers to entry
  3. Homogenous products (Identical)
  4. Perfect knowledge
  5. Price takers

Perfect Competition – Diagrams

 

  • A perfectly competitive firm will make supernormal profits in the short run and normal profits in the long run.
  • Firms under perfectly competitive markets aim to profit maximise at MC = MR.
  • Perfectly competitive firms are also price takers and therefore have a horizontal demand curve (AR & MR).
  • Initially the newsagent will be the only firm in the market or local area. This will allow the firm to make supernormal profits in the short run due to a lack of competition.

 

 

  • However in the long run other entrepreneurs will be attracted by this firms profits. Also due to the low barriers to entry new firms will enter the market increasing the number of firms. This would cause the supply curve to shift right and lower the price level. 
  • It’s clear to see the AR = MR curve is lower in the long run diagram than the short run diagram. The P = AR = MR curve is at the bottom of th AC curve in the long run. However the P = AR = MR was above the AC curve in the short run diagram.
  • Supernornal profits will now be competed away between all the firms in this market. They will all therefore be making normal profits in the long run.
  • New firms were easily able to enter due to the low barriers to entry, perfect knowledge of how firms operate in this market and due to the products being identical.

 

 

 

 

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