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    Perfect Competition Market: References: Koutsoyannis and Ferguson & Gould

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    Yogesh Jha
    Perfect competition is a market structure with many small firms, homogeneous products, free entry and exit of firms, and perfect information. In the short run, firms can earn abnormal profits or losses but will settle at the break-even point of total revenue equaling total cost where marginal cost equals marginal revenue. In the long run, free entry and exit of firms will occur until economic profits are driven down to zero and firms earn only normal profits, where price equals average cost at the minimum point of the long-run average cost curve.

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    Perfect Competition Market: References: Koutsoyannis and Ferguson & Gould

    Uploaded by

    Yogesh Jha
    21 views14 pages
    Perfect competition is a market structure with many small firms, homogeneous products, free entry and exit of firms, and perfect information. In the short run, firms can earn abnormal profits or losses but will settle at the break-even point of total revenue equaling total cost where marginal cost equals marginal revenue. In the long run, free entry and exit of firms will occur until economic profits are driven down to zero and firms earn only normal profits, where price equals average cost at the minimum point of the long-run average cost curve.

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    Perfect Competition_01.04.22

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    Perfect competition is a market structure with many small firms, homogeneous products, free entry and exit of firms, and perfect information. In the short run, firms can earn abnormal profits or losses but will settle at the break-even point of total revenue equaling total cost where marginal cost equals marginal revenue. In the long run, free entry and exit of firms will occur until economic profits are driven down to zero and firms earn only normal profits, where price equals average cost at the minimum point of the long-run average cost curve.

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    21 views14 pages

    Perfect Competition Market: References: Koutsoyannis and Ferguson & Gould

    Uploaded by

    Yogesh Jha
    Perfect competition is a market structure with many small firms, homogeneous products, free entry and exit of firms, and perfect information. In the short run, firms can earn abnormal profits or losses but will settle at the break-even point of total revenue equaling total cost where marginal cost equals marginal revenue. In the long run, free entry and exit of firms will occur until economic profits are driven down to zero and firms earn only normal profits, where price equals average cost at the minimum point of the long-run average cost curve.

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    of 14

    Perfect Competition Market

    References: Koutsoyannis and Ferguson & Gould


    Markets Form

    PerfectCompetition Imperfect Competition Monopoly

    Monopolistic Competition

    Oligopoly

    Duopoly
    Meaning of Perfect CompetitionMarket

    “A Market situation in which a large number of producers or


    sellers producing andselling homogeneous product.”
    FEATURES

    • Each sellers sell a small portion total


    Large no. of buyers and sellers
    • Single sellers has no influence on market
    • Sellers are price taker

    Homogeneous product • Identical product


    • Same price and cost

    Free entry and exit


    • There is no government or other control
    Perfect knowledge about
    • Perfect knowledge about the prevailing price.
    market

    Absents of Advt. cost


    • Homogeneous product, so no advt. needed

    A single price of product


    • Price is determined in the industry.
    Nature of AR, MR Curve of a firm

    Out put Price


    Price TR AR MR
    1 10 10 10 10 Demand andAR, MR Curve of a firm
    2 10 20 10 10
    3 10 30 10 10
    Price
    4 10 40 10 10
    5 10 50 10 10 Price=AR=MR
    6 10 60 10 10
    7 10 70 10 10
    8 10 80 10 10 Output
    The firms equilibrium(Out put determination)

    ➢ First Condition for maximization of profit is MR= MC

    ➢ Second Condition for maximization of profit is MC curve cuts MR


    curve from below

    Industry Firm ( is a PriceTaker)

    Supply Curve
    E0 Price P F MC
    Price E
    MC=MR
    Price=AR=MR

    Demand Curve
    O
    Output Output M
    SHORT RUN

    • Abnormal Profit/Positive Profit:TR>TC


    • Normal Profit:TR=TC
    • Loss/Negative Profit:TR<TC
    Short run equilibrium of a firm with Abnormal Profit

    Price
    Firm withProfit

    MC AC

    MC=MR

    P E Price=AR=MR
    Profit: TR>TC
    Pi F

    O M
    Output
    Short run equilibrium of a firm with Normal Profit

    Firm withProfit

    SRMC
    Price SRAC
    MC=MR
    Price=AR=MR
    Pi=P E=F
    TR = TC

    O M
    Output
    Short run equilibrium of a firm withLoss

    Firm withProfit

    AC

    MC
    Price
    F
    Pi
    Losses TR<TC Price=AR=MR
    P E
    MC=MR

    O
    M
    Output
    LONG RUN
    • In Long Run the firm can only earn NORMAL PROFIT

    • This is due to the existence of Free Entry and Exit feature of Competitive Market
    Long run equilibrium of a firm with Normal Profit

    Firm withProfit

    LRMC
    Price LRAC
    MC=MR
    Price=AR=MR
    P = Pi
    E=F
    TR = TC

    O M
    Output

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