Perfect Competition Short - Term : Supernormal Normal Survival

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Presentation transcript:

Perfect Competition Short - Term : Supernormal Normal Survival Out of Business Long - Term

Perfect Competition Assumptions : Homogenous product. Price Taker. Perfect Knowledge. No barriers to entry / exit. Profit Maximisers @ MC = MR. Easily transportable. Large number of buyers and sellers.

Supernormal Profits made under Perfect Competition (Short-Term) THE FIRM MC ATC MC=MR D/AR/MR P AVC ATCQ Q

Normal Profits made under Perfect Competition (Short-Term) THE FIRM ATC MC AVC D/AR/MR ATCQ/P Q

Minimising Loss under Perfect Competition (Short-Term) THE FIRM ATC MC AVC ATCQ D/AR/MR P Q

Close down Position under Perfect Competition (Short-Term) THE FIRM ATC MC AVC D/AR/MR P Q

Comparison of Perfect Competition and Monopoly Perfect Competition MC Monopoly MC MC=MR P2 P1 D/AR MR Q 2 Q 1

Advantages of Perfect Competition Price is just sufficient to give the firm a normal profit. Customer gets product at lowest possible price, therefore is not exploited. Each firm must produce at its most efficient output. Public gets the greatest output from resources used to produce a good. Firms will develop new technology to earn supernormal profits. Advertising has no value and is stopped ; keeping down prices. There is an automatic reaction to changes in demand. When demand changes, supply changes, due to the profit motive that causes firms to enter and exit the industry.

Disadvantages of Perfect Competition There is no guarantee of equal distribution. Wastage due to large - scale duplication of small firms. Small firms lack funds to invest in research and development. Lack of will to invest due to rights of other firms to perfect knowledge. Homogenous product leads to lack of variety. Large companies achieve economies of scale and produce at lower cost than small firms. Market loses competitiveness.