P9 Content:

Market Structure & Characteristics of Perfect Competition:

-What is market structure
-Characteristics of a market
-Market Structure Continuum
-Characteristics of perfect competition
-Assumptions of perfect competition
-Demand Curve for the Perfectly Competitive (PC) firms, as well as demand supply
curve in industry
-Activity 1

Profit maximization:
-What is profit
-Revenue concept
-Comparison between revenue and cost concept
-Shape of revenue curve in revenue quantity graph and revenue in price quantity
graph
-Profit maximization
->Including 2 approaches to profit maximization
-Activity 2

Short run profit maximization decision making:

-Brief recap of short run vs long run of profit maximization
-Profit Maximization Decision Making
-Short-Run Profit Analysis
-Short-Run Possible Profit Outcomes
-Short-Run Decision to Shut Down
-The Firm’s Short-run Supply Curve
-Firm and Market Supply
-Activity 3

Long run profit maximization decision making:

-What happens in the long run when existing firms are making Subnormal profits?
->Activity 4
-What happens in the long run when existing firms are making Supernormal profits?
-Long-Run Decisions in Perfect Competition
Perfect Competition & Efficiency

-Summary
What is market structure
-An Industry (Market structure) refers to a group of firms that supply output to a
particular market (E.g. Petroleum market) or produces a similar/same product
-> Industry (Market structure) Example: Shell, Esso, Caltex, SPC (Group of firms)
are part of the Petroleum industry

-Market Structure refers to the characteristics of the market that significantly affect
the behaviour and interaction of buyers and sellers
->Which means what characteristics of market suit what type of market structure,
and different market structure will significantly affect the behavior and interaction of
buyers and sellers

Characteristics of a market include:

-There are different characteristics of a market which include:
->Number and size of sellers
->Market share of sellers
->Extent of product differentiation
->Ease of the entry into and exit of the market (Factor
mobility)
->Knowledge of market (Does consumer know your product
well?)

-Each different characteristic has a spectrum, and based on

the spectrum on each characteristic, they are classified into
different market structure.

Market Structure Continuum

-The four common market structures, perfect competition, monopoly, monopolistic
competition, and oligopoly can be viewed as a continuum based on:
->Differences in the number of firms in a market
->The relative size of each firm,
->The market control of each firm.
->Etc… As above.

-Perfect competition lies at one end and monopoly at the other. Monopolistic
competition is close to perfect competition and oligopoly is near monopoly.
-The essence of the continuum is that monopolistic competition blends into oligopoly,
with no clear-cut line of separation.

-At one end of the continuum, perfect competition has a large number of small firms
with no market control.
-Moving along the continuum, monopolistic competition has a large number of small
firms with some market control.
->Further along, monopolistic competition blends into oligopoly, which has a small
number of large firms with extensive market control. Reaching the other end,
monopoly has a single firm with complete market control.
 Characteristics of perfect competition:

Characteristics of Explanation
perfect competition
Many buyers and -In perfect competition industry, it consists of a large number of consumers and
sellers firms (i.e. (Which also means that) each buyer or seller is only a small fraction of
the market)
->Perfectly competitive market or industry contains a large number of small firms,
each of which is relatively small compared to the overall size of the market.
-> If a firm enters into the market or exit the market, there will be no effect on the
supply. Similarly, if a buyer enters into the market or exit from the market, demand
will not be affected. Thus, no individual buyer or seller can affect the price.

Example 1 is Phil's home-grown zucchinis (Many sellers):

-Phil is one among gazillions (a really large number) of people who grow zucchinis
in their backyard gardens. Phil has no control over the zucchini market because the
total zucchini market contains gazillions of zucchini producers, each producing only
a handful of zucchinis.

->If Phil decide to produce more zucchinis, fewer zucchinis, or none at all, the
zucchini market and especially the zucchini price are unaffected.
->Zucchini buyers continue buying zucchinis from the remaining
gazillions of zucchini producers as if nothing changed.
->As far as the market is concerned, nothing has changed.

Price-taker -In perfect competition industry, Firms are usually price-taker whereby no single
firm can influence the market price, or market conditions (Not big market share
enough)
->This ensures that no single firm can exert market control over price or quantity.
->If one firm decides to double its output or stop producing entirely, the market is
unaffected.
->The price does not change and there is no discernible (Visible) change in the
quantity exchanged.

->Market Price “P” in a perfectly competitively market is determined by the

interaction of demand and supply forces in the industry (Market)
 ->Price takers accept the ruling market price and sell each unit at the same price.
AR=MR. We find price takers in perfectly competitive markets.

Homogenous -In perfectly competition, firms produce identical products that are not branded and
products are perfect substitutes

No barriers to entry -Perfectly competitive firms are free to enter and exit an industry.
and exit -They are not restricted by government rules and regulations, start-up cost, or other
barriers to entry.

->While some firms incur high start-up cost or need government permits to enter an
industry, this is not the case for perfectly competitive firms.
->Likewise, a perfectly competitive firm is not prevented from leaving an industry as
is the case for government-regulated public utilities.

-Perfectly competitive firms can acquire whatever labour, capital, and other
resources that they need without delay and without restrictions.
->There is no racial, ethnic, or sexual discrimination.

E.g.:
-If Phil wants to leave the zucchini industry and entry the kumquat industry, he can
do that without restriction (E.g. approval, start-up cost (Investing millions in
machines), advertising for brand name recognition)
-Likewise, if Becky is a kumquat producer who wants to entry the zucchini
industry, she can do so without restraint.

->Phil and Becky are not faced with up-front investment cost nor brand name
recognition that might prevent them from entering a perfectly competitive industry.

E.g. (Barriers to entry and exit):

Quadra DG Computer Works entered the market it needed to build several
expensive factories, spend millions of advertising dollars to achieve brand name
recognition, and obtain several government patents to produce its Quadra 400
Data RAM Cartridges.
->Additionally,
because Quadra 400 Data RAM Cartridges are used in top secret military projects,
hence, Quadra DG Computer Works is not allowed to stop producing Quadra 400
Data RAM Cartridges without authorization from the Secretary of Défense and an
act of Congress.

Perfect market In perfect competition, Buyer and sellers are fully aware of market prices and costs,
knowledge quality and availability of products

-A competitive market is when the buyers and sellers are in close contact with each
other.
->It means that, there is perfect knowledge of the market on the part of buyers and
sellers.
->Such that a large number of buyers and sellers in the market exactly know how
much the price of the commodity (Goods) in the market is.
 -In perfect competition, buyers are completely aware of sellers' prices, such that
one firm cannot sell its good at a higher price than other firms.
->Each seller also has complete information about the prices charged by other
sellers, so they do not inadvertently charge less than the going market price.

-Perfect knowledge also extends to technology. All perfectly competitive firms have
access to the same production techniques.
->No firm can produce its output faster, better, or cheaper because of special
knowledge of information.

Perfect Mobility* There must be perfect mobility of factors of production within the country which
(Under assumptions ensures uniform cost of production in the whole economy.
of perfect ->It implies that different factors of production are free to seek employment in any
competition) industry that they may like.

->The skills acquired by workers and the productivity of capital are likely to be very
similar across firms producing identical or closely substitutable products. Although
there would likely be some transition costs incurred, such as search, transportation
and transaction costs, it remains reasonable to assume for simplicity that the
transfer is costless.

Assumptions of perfect competition

Assumptions of perfect competition Description

-In perfect competition, we assume an absence of -Transport costs are assumed to be negligible
transport costs (Which transport costs may lead to
market do not have a perfect competition)

-In perfect competition, there is perfect mobility of -Resources, such as labour, are homogeneous,
factors of production and are freely mobile (Movable) ->Such as in
China/Japan/Singapore/Russia

-In perfect competition, there is no government -There are assumed to be no externalities

intervention (external costs and benefits), and thus no need
for government regulation
 Demand Curve for the Perfectly Competitive (PC) firms, as well as demand
supply curve in industry

Market Equilibrium Firm’s Demand curve (Price elasticity)

-Market Price “P” in a perfectly competitively market is -The demand for an individual firm is a
determined by the interaction of demand and supply horizontal line at the market price “P”
forces to give rise to an equilibrium market price, and determined by the market.
equilibrium quantity ->Demand is perfectly price elastic, which
means a small change, e.g. increase in price,
-In perfect competition, market equilibrium price will lead to an infinity change in demand
would set the price that the firms would sell at (Firms quantitated. (For firms that are operating in
are price takers) perfect competition)
->Goods the firm sell at would be the market
equilibrium price
->As they are price takers, which would accept the
ruling market price and sell each unit at that specific
same price. 
-In perfect competition, firms, which are price takers,
would sell their goods at the market equilibrium price
->As firms are not significant enough/have any
market control to influence the price of a good or
service (Many small firms)
Activity 1:
Oscar owns a small farm in Ireland and like many farmers in Europe, supplies milk to
the EU countries at the prevailing market price.

Sketch the demand curve faced by Oscar:

Based on the knowledge gained in earlier lesson, what is the price elasticity of
demand faced by Oscar?
Perfectly price elastic. (As the firm is operating in a perfect competition market
structure)

Illustrate with a graph how the market price for milk is determined:
->Equilibrium point

What is profit
-Profit is a financial benefit/gain when the amount of total revenue gained from a
business activity exceeds the total cost
->Profit = Total revenue – Total cost
Revenue concept

Revenue concepts Formula

Total Revenue (TR) TR = Price (P) X Quantity (Q)
Marginal Revenue (MR)
(MR is the additional revenue earned by Δ TR
MR = =P
selling one more unit of output) ΔQ

Average Revenue (AR) TR

AR = =P
(total revenue per unit of output) Q

From the formulas we can infer that:

P = AR = MR = D

Note the 3 points:

1) For a firm in a perfectly competitive market, price is equal to both average
revenue and marginal revenue. P=MR=AR
->ONLY TRUE in perfectly competitive market (Only occur)

2) Condition for profit maximization is MR=MC

->This is true in any type of market (All types of market structure, including
perfectly competitive market structure)

3) Combine these two results together: For a profit maximizing firm in a perfectly
competitive market, it will choose the output where price is equal to marginal cost.
MR (P) =MC (Profit is maximised when MR = MC at specific output of good, Profit
cannot increase even further if output were to increase by 1 profit maximizing
point)

To understand this chapter, we need to know that:

-In economics, the opportunity cost, which can include your (Owner) salary (Time -
>Opportunity cost), is being as part of the total cost
->Which means that the total revenue earn is able to cover the total cost, which
includes the opportunity cost.
->Total cost in economics includes the total opportunity cost of each factor of
production as part of its fixed or variable costs. 
 Comparison between revenue and cost concept

Cost Formulas Revenue Formulas

-Total cost (TC) = Total fixed cost (TFC) + Total -Total revenue (TR) = Price X Quantity
variable cost (TVC)  
  -Average revenue (AR) = Total revenue / Quantity
-Average variable cost (AVC) = Total Variable  ->Revenue earned per unit of output.
Cost (TVC) / Quantity (Output) -Marginal revenue (MR) = Change in total revenue /
  Change in quantity (Output)
-Marginal cost (MC) = Change in total cost (TC) /
Change in quantity (Output)
Total Profit = Total revenue - Total cost

Shape of revenue curve in revenue quantity graph and revenue in price

quantity graph

Units Sold Price ($) TR ($) AR ($) MR ($)

1 10 10 10 10
2 10 20 10 10
3 10 30 10 10
4 10 40 10 10
5 10 50 10 10

Price-Quantity curve Revenue-Quantity curve

-MR is constant at $10, which means an -As quantity demanded (Sold) increases, the
additional good would lead to a constant amount of total revenue increases as well,
increase in total revenue. contributed by the marginal revenue with every
-However, Total revenue is not illustrated in this good sold,
curve. It can be calculated /infer through the
quantity demanded/sold
->E.g. 10 quantity sold, total revenue = 10 x $10
= $100

Profit Maximisation
-The Perfectly competitive (PC) firm has no control over price, but it can decide what
is the quantity of goods to produce at the prevailing (current) market price.
->Hence, how much should the firm produce to earn maximum profit?
(Since TR = P X Q, P is unable to be changed, but quantity is able to be changed,
hence how much quantity the firm produce determine the total revenue the firm
would earn, and hence, leading to the maximum profit as P = TR – TC)

Two approaches to profit Maximisation (To find out the quantity that firm needs to
produce to earn maximum profit (Maximum profitability):
1)Total Revenue –Total Cost (TR –TC) approach
->Total cost which includes fixed cost

2)Marginal Analysis approach

1st approach to profit maximization of business: (TR-TC) approach

-Specific output with highest amount of TR and lowest amount of TC gives highest
profit for the business. (Output that gives highest profit for the business)

Profit-Maximizing Output (Q*)

-A perfectly competitive firm
chooses the output, Q* that
maximizes its economics profit.

-One way to find the profit-

maximizing output is to examine
the firm’s total revenue and total
cost curves as shown.
When TR < TC:
Economic loss at low output
When TR > TC:
Economic profit
When TR < TC:
Economic loss at high output

-At Q* Quantity, whereby TR > TC, Gap between TR and TC is largest, denoting a
highest amount of TR, and lowest amount of TC.

2nd approach to profit maximization of business: Marginal Analysis

-Output that gives highest profit for the business

In marginal analysis, when:

MR > MC MR < MC MR = MC (Profit maximizati

-It is the extra revenue
gain from selling one more
unit is more than the extra
cost
->The firm should increase
output when MR > MC to
increase profit
-For maximum profit, the firm will produce at the level of output at which MC = MR
-It is the extra revenue from selling
one more unit is less than the extra
cost
-The firm should decrease output
when MR < MC to increase profit
-The extra revenue from selling
more unit is equal to the extra
-The firm’s profit is maximized
this point
->E.g. At 8th sweater (Blue sha
MR > MC, which means profit
yet maximized, hence 1 more
output should be produced
->However, upon 9th sweater, M
MC, which means at this point,
profit is maximized. Any increa
output after this would lead to l
profits earned as MR would be
MC.

-This condition is true for ALL market structures

Rule of thumb for profit Maximisation:

In profit maximisation MC = MR (True for ALL market structures)

Activity 2:
 Calculation of values in table:
Total Revenue = P X Q
Total profit = Total revenue – Total cost

Total Cost Marginal Average Average

Quan Market Total Total Average Marginal
(Fixed + Revenu Total Variable
. Price Revenue Profit Revenue Cost
Variable) e Cost Cost
1.09(Fixed
0 cost) 0 -$1.09
1 1.46 $0.8 -$0.66 $1.46 $0.37 $0.37
2 1.80 $1.6 -$0.20 $0.9 $0.355 $0.34
3 2.09 $2.4 $0.31 $0.696 $0.33 $0.29
4 2.35 $3.2 $0.85 $0.587 $0.32 $0.26
5 2.65 $0.8 $4 $1.35 $0.8 $0.8 $0.53 $0.31 $0.30
6 3.18 $4.80 $1.62 $0.53 $0.35 $0.53
7 3.98 $5.6 $1.62 $0.568 $0.41 $0.8
8 4.95 $6.4 $1.45 $0.618 $0.48 $0.97
9 6.20 $7.2 $1 $0.688 $0.57 $1.25
10 7.50 $8 $0.5 $0.75 $0.64 $1.3

1a) The graphs for Average Total Cost (ATC), Marginal Cost (MC), Average Variable
Cost (AVC), Marginal Revenue (MR), Average Revenue (AR) curves have been
plotted for you in Diagram 1. Based on your pre-readings and the values calculated
in Table 1, identify the graphs labelled Series1 to Series4.
Series 1: Average Revenue (AR) = Marginal Revenue (MR) = D = P = $0.80
Series 2: Average Total Cost
Series 3: Average Variable cost
Series 4: Marginal cost

1b) State and explain at what quantity Oscar

should sell milk in order to maximize his profit.

-To maximise Oscar’s profit, he should sell 7 milk

quantity
-As at 7th quantity, the MR = MC
(The quantity number in the picture is not very
accurate, for illustrating and understanding of
concept only)

Brief recap of short run vs long run of profit

maximization
 Short run production:
-Short run is defined as the period during which changes in certain factors of production are not
possible (Some factor of production is fixed, limiting)
->The short run is a time period where at least one factor of production is in fixed supply
->Law of Diminishing Marginal Returns apply in short run production (Due to fixed factors of
production), NOT in long run production

-We assume that the quantity of plant and machinery is fixed, and that production can be altered by
changing variable inputs such as labour and raw materials
Long run production:
-Long run is defined as the period during which all factors of production can be varied
->E.g. Land, Labour, Capital (Equipment), all can be varied

->Law of Diminishing Marginal Returns does NOT apply in long run production
Note that:
-There is no definite time-frame for short run and long run.
->It depends on when you can actually vary the fixed factor
->Such as when you renew rental lease (Might choose to keep the space same or expand space or
downsize) or able to buy new equipment, then that might be considered varied.
->Or if the rental lease is 6 months, the short run whereby one resource is fixed is 6 months, which is
the rental lease
E.g.:
If every worker comes with a stove, the stove (Capital input) ceases to be a fixed factor (As it varies
depending of the amount of worker you hire).

Short run
-All production in real time occurs in the short run.

In the short run, a profit-maximizing firm will:

-Increase production if marginal
cost < marginal revenue (added revenue per
additional unit of output)

-Decrease production if marginal cost

> marginal revenue

-Continue producing if average variable

cost is less than price per unit, even
if average total cost is greater than price.
->Shut down if average variable cost is
greater than price at each level of outputs
P = Min AVC at profit maximising output ->Shutdown point.
Long run
-In the long run, firms change production levels in response to (expected) economic
profits or losses, and the land, labour, capital goods and entrepreneurship vary to
reach the minimum level of long-run average cost.
In the simplified case of plant capacity as the only fixed factor, a generic firm can
make these changes in the long run:
-Enter an industry in response to (expected) profits
-Leave an industry in response to losses
-Increase its plant in response to profits*
-Decrease its plant in response to losses*

-The long run is associated with the long-run average cost (LRAC) curve which a
firm would minimize its average cost (cost per unit) for each respective long-run
quantity of output.
->Minimum LRAC = price is efficient as to resource allocation in the long run.
->The concept of long-run cost is also used in determining whether the long-run
expected to induce the firm to remain in the industry or shut down production there.

Transition from short run to long run

-The transition from the short run to the long run may be done by considering some
short-run equilibrium that is also a long-run equilibrium as to supply and demand,
 Profit Maximization Decision Making

Short run Long Run

-In short run, business can make supernormal, -States that a competitive firm will earn normal
normal or subnormal profit. profit in the long run due to new
(Even when firm maximises profit, the amount of ->Firms entering the industry
profit they made can be classified to these 3 types) ->Firms exiting the industry

Business should continue to produce goods if:
-It is earning a profit (TR > TC)
-Or P > AVC (Price > Average variable cost)
->Some fixed cost and all variable cost can be
covered.
->If the revenue the firm is making is greater than
the variable cost (R>VC) then the firm is covering
its variable costs and there is additional revenue to
partially or entirely cover the fixed costs.
-Business can earn subnormal profit in the short
run, but in the long run, since some firms exit, it
results in market price to increase, leading to
existing firms price of good to increase, and hence,
total revenue to increase ->Total profit increase,
which may lead to firm able to cover all TC
-Similarly, business can earn supernormal profit in
short run, which lead to firms entering in the long
run, bringing market price down, hence firm price
down ->Leads to total revenue decrease
->Total profit of firm to decrease.

Short-Run Profit Analysis (How to analysis profit in the short-run):

Steps to analyse short-run profit outcome:
1) Find the intersection where MR = MC to maximize profit
(i.e. Profit at highest when MC curve intersect with MR
curve)

2) From this intersection, trace a line downward to find the

quantity where profit is maximised (in this case, it is
Quantity “Q”)
->We can find TR through this (P X Q)

3) The vertical line drawn in Step 2 will intersect ATC

curve.
->From this 2nd intersection, trace a horizontal line to the
left to read off the value of the ATC from the vertical axis.
->We can find TC through (ATC amount in $ at Q x Q)

4) The shaded area gives the magnitude of the profit

-> (P – ATC) x Q
 -Total revenue = MR intersects with MC
-Total cost = ATC at x Price X ATC at x quantity
-Profit = Total maximum revenue – total cost

Short-Run Possible Profit Outcomes

-Supernormal profit
-Normal profit
-Subnormal profit

Supernormal Profit Normal Profit Subnormal Profit

-Also known as Economic Profit
-At profit-maximizing output
where MC = MR
-P (or AR) is >ATC
->P > ATC
-Also known as Breakeven point
-At profit-maximizing output
where MC = MR
-Point where P (or AR) is equal to
ATC
->P = ATC
-Also known as Economic Loss
-At profit-maximizing output
where MC = MR
-P (or AR) is less than ATC
->P < ATC
-Firm should decide if it should
shut down

-In economics the opportunity cost, which can include your salary, is being as part of
the total cost.
->Which means that the total revenue earn is able to cover the total cost, which
includes the opportunity cost.
->Hence during normal profit, business can also carry on operating as all of their
costs are being covered (Total cost)
->Total cost in economics includes the total opportunity cost of each factor of
production as part of its fixed or variable costs. (Wikipedia)

-Lowest total cost, and highest total

revenue ->Highest profit
Short-Run Decision to Shut Down
-AFC (Average fixed cost) + AVC (Average variable
cost = ATC (Average Total cost)
->AFC is the vertical distance between AVC and ATC

-When production at P > AVC, it means some fixed

costs can be covered. (Between $17-$20.14)

-Production at P < AVC means all fixed costs and

some variable costs cannot be covered
Shutdown point:
- Shutdown point is when Price = min AVC

The Firm’s Short-run Supply Curve

-In the short run, the competitive firm’s supply
curve is its marginal-cost curve (MC) above
average variable cost (AVC).

->If the price falls below the minimum of

average variable cost (min AVC), the firm is
better off shutting down.
 Firm and (Vs) Market Supply:

-When the number of firms in the market is fixed, the market supply curve, shown in panel
(b), reflects the sum of individual firms’ marginal-cost curves, shown in panel (a).
->Market supply curve = Sum of individual firms supply at specific price
-Here, in a market of 1,000 firms, the quantity of output supplied at each price point to the
market is 1,000 times the quantity supplied by each firm at the same price point.

Activity 3
3) Diagram 2a shows the short-run cost and revenue curves of a typical European
farm selling milk just like Oscar’s.
 3a) Using Diagram 2a, state the corresponding profit maximizing output, ATC, the
type of profit a typical farm will earn by filling in the Table. State also the profit or
loss area for each given price.

Price Profit Maximizing ATC at Short-Run Profit Total Profit / Loss

Output output Outcome & Reason
(Vertically)
0.20 6 $0.55 Sub-normal profit TR = $0.20 x 6 = $1.2
TC = $0.55 x 6 = $3.30
Profit = $1.20 - $3.30 = - $2.10

0.50 7 $0.5 Normal profit TR = $0.50 x 7 = $3.50

TC = $0.50 x 7 = $3.50
Profit = $3.50 - $3.50 = 0

1.00 8 $0.55 Supernormal profit TR = $1 x 8 = $8

TC = $0.55 x 8 = $4.40
Profit = $8 - $4.40 = $3.60

3b) Diagram 2b includes the average variable cost curve of a typical European farm
selling milk, what will happen if the equilibrium price drops to $0.30? Analyse and
explain if a typical farmer like Oscar should continue or shutdown his milk business.

At the new profit maximization level (MC = MR), since price of $0.30 is less than the
minimum AVC of $0.35, the farmer should shut down his business as he cannot
cover his fixed cost as well as full amount of Variable cost.
Thus, when price is less than minimum AVC at the profit maximization level, the
business should shut down its operation.
What happens in the long run when existing firms are making Subnormal
profits (Survival of the fittest)?
-Firms exit as long as they are incurring subnormal profits (economic losses) (Their
price sold is equal to or less than the shutdown point).
->In the long run, the market supply decreases and market supply curve shift
leftwards.

-It would lead to the market price to rise, resulting in the firms to make normal profits
(zero economic profits) (New market price), where P = ATC at minimum (or MR
curve intersects the lowest point of ATC curve)
Activity 4:
Diagram 3 shows the market equilibrium for the
European milk industry.

a) What do you think will happen when new

entrants, attracted by supernormal profits, enter the
industry? Illustrate this using Diagram 3.
Answer explained below.

b) What would be the impact of 4a on a typical milk

business like Oscar’s? Explain using appropriate
graphs and show the profit outcome in the long run.
Answer explained below.

What happens in the long run when existing firms are making supernormal
profits?
-New firms will enter the industry as long as existing firms are making supernormal
profits (economic profits).
->As new businesses would want to earn/gain from the supernormal profits

-In the long run, the market supply increase and market supply curve shifts
rightwards.
->Leads to the market price to falls, resulting in firms to make normal profits (zero
economic profits), where P = ATC at minimum (or MR curve intersects the lowest
point of ATC curve)
Perfect Competition & Efficiency (Long run):
-In the long run, firms in perfect competition are
1) Productive efficient Firms:
-Firms that produce at minimum long run average
cost curve (Firm produce good at the lowest possible
cost)
-Lowest unit cost possible
->P = Min LRAC

2) Allocative efficient firms:

-Producing at where marginal revenue is equal to
marginal cost (And that is also when profit is
maximised)
->Produce at the point where P = MC
->No deadweight loss, market operating/resources
allocated efficiently
Leo quiz P9:
1)
2) ->If firm make supernormal profit in short run ->Make normal profit in long run
(Due to new firms entering the market)
3)
4) P = MR = AR
5) In perfect competition, firms are price takers
6)
7)