1. Perfect Competition Assumptions of the model
Demand curve facing the industry and the firm in perfect competition
Profit-maximizing level of output and price in the short-run and long-run
The possibility of abnormal profits/losses in the short-run and normal profits in the long-run
Shut-down price, break-even price
Definitions of allocative and productive (technical) efficiency
Efficiency in perfect competition

2. Assumptions Homogenous products – all the same
Freedom of entry and exit from industry
Perfect knowledge (about prices and lowest cost production)
Many firms and customers
Firms are price takers – they cannot influence the market price.
Task! Question 1, page 305.

3. Demand curve
Firms are small relative to market size and can sell any amount of output at the market price – but cannot influence it.
Products are homogeneous – customers only concern is price.
Therefore firms face a perfectly elastic demand curve.
Also MR = AR

4. Implications of freedom of entry and exit?
Abnormal profits will lead to firms entering the industry in the long run.
Loses will force firms to leave the industry in the long run
What is the level of profits earned in the long run?

5. Normal profit and the Long run
Firms maximise profit where MR= MC.
In the long run firms will only be able to make normal profit, AC = AR. This is because is freedom of entry and exit.

6. Short run possibilities

7. Task!
Complete Question 4 – The price of gold

8. Shut down when making a loss?
If a firm is making a loss in the short run should it close down IMMEDIATELY?
It has to pay its fixed costs until the long run (when all costs and associated factors become variable.)

9. SR loss making and shut down
What is happening in each of the price levels shown?

10. Efficiency Productive efficiency – achieved at lowest average cost
Allocative efficiency – achieved when P=MC in all industries. If this is the case welfare cannot be increased by increasing / reducing production levels in different industries

11. Perfect competition and efficiency
In the long run firms produce at the lowest point on their AC curve – they are productively efficient.
Firms produce where P = MC hence they are allocatively efficient.
Why is the MC curve the firm’s supply curve?

12. Homework
Pig production