G r o u p M e m b e r s : 1.. ) R a z m a Z e h r i 2. ) M a d i h a I m t i a z 3. ) G h a z a l a I m a m

Presentation by Razma Zehri:

 Assumptions:  Large number of firms.  Individual firms are “price takers”.  Freedom of entry and exit.  Perfect knowledge of the market.

 Homogeneous products.

Demand curves for industry and firm in perfect competition  Industry:  Normal demand and supply curves.  More supply at higher price and less demand and higher price.  Firm:  Price takers.  Have to accept the industry price.

Profit maximization for the firm in perfect competition  Profit maximization rule: MC=MR  For a firm, P=D=AR=MR

Presentation by: Madiha Imtiaz [Perfect competition in short run]

There are certain situations in Short run for perfectly competitive markets:  The firm may earn super-normal profit.  Normal profit  The firm may incur losses: 1. The firm is not even able to meet up its variable cost. 2. The firm is able to meet up its variable cost. 3. The firm is covering its full variable cost and a part of fixed cost.

Short run abnormal profit in perfect competition  Firms are more than covering their total cost of production.

Short-run abnormal profit to long-run normal profit  Short-run abnormal profit attracts more firms to the industry.(Freedom of entry)  Supply curve shifts to the right.(S to S1)  This pulls down the price. (P to P1)  At new price, P= C showing normal profit.

Short-run loss in perfect competition  Firms are not covering their total cost.

Short-run losses to log-run normal profit  Due to losses, a few firms will leave the industry.(Freedom of exit)  Supply curve shifts to the left.(S to S1)  Industry price begin to rise.(P to P1)  At new price, P=C (normal profit)

Presentation by: Ghazala Imam

Long-run equilibrium  In the long-run, firms in perfect competition can make only normal profit.  Freedom of entry and exit eliminates the short-run abnormal profit and short- run losses.  In the long-run equilibrium, there is no incentive for firms to enter or leave the industry.

MC=MR Profit maximization MC=AC Productive efficiency MC=AR Allocative efficiency

Productive and allocative efficiency  Productive efficiency:  A firm is productive efficient when it produces at its lowest possible unit cost(average cost)  MC=AC  This means the combination of resources is efficient and there no wastage of resources.

Productive and allocative efficiency  Allocative Efficiency:  This is socially optimum level of output.  Producers are producing the optimal mix of goods and services required by consumers.  Price reflects the value that consumers place on a good.  MC=AR Cost to producers The value to consumers

Pareto Optimality  Allocative efficiency means there is Pareto optimality.  Situation where it is impossible to make one person better off without making someone else worse off.  An economic state where resources are allocated in the most efficient manner.

Productive and allocative efficiency in the long run  In the long run, Profit maximization level of output=productive efficiency=allocative efficiency.  This is because, there is perfect knowledge and same cost curves.

Examples of perfect competition:  Financial markets – stock exchange, currency markets, bond markets.  Agriculture.

Advantages of Perfect Competition: High degree of competition helps allocate resources to most efficient use Price = marginal costsNormal profit made in the long runFirms operate at maximum efficiencyConsumers benefit