UNIT 8

Understand the features of perfect competition.

 PERFECT COMPETITION

Perfect competition occurs when none of the individual market participants (i.e.
buyers or sellers) can influence the price of the product.

The price is determined by the interaction of demand and supply and all the
participants have to accept that price.

All the participants in the market are therefore price takers – they have to accept
the price as given and can only decide what quantities to supply or demand at that
price
 PERFECT COMPETITION - CONDITIONS
• Large number of buyers and sellers

• All the goods sold in the market must be identical (i.e. the product must be homogeneous)

• Complete freedom of entry and exit.

• Perfect knowledge of market conditions.

• No government intervention – Influencing buyers or sellers

• No collusion

• Factors of production are perfectly mobile

 PERFECT COMPETITION – DEMAND
• Under perfect competition the price of a product is determined by supply and

demand. The individual firm is a price taker and can sell any quantity at the

market price.

• The individual firm`s demand curve is horizontal (or perfectly elastic) at the

existing market price. It is sometimes referred to as the firm’s sales curve, the

firm’s demand curve, or the demand curve facing the firm.

PERFECT COMPETITION - DEMAND
 PERFECT COMPETITION – REVENUE
• Under perfect competition the firm receives the same price for any number of

units of the product that it sells.

• Its marginal revenue (MR) and average revenue (AR) are therefore both equal to

the market price, that is, MR = AR = P.

PERFECT COMPETITION – REVENUE
PERFECT COMPETITION -EQUILIBRIUM CONDITIONS
FOR ANY FIRM
THE SHUT-DOWN RULE
• A firm should produce only if total revenue is equal to, or greater than, total
variable cost (which includes normal profit).
In other words, a firm should only produce if average revenue (i.e. price) is equal to,
or greater than, average variable cost.
The second rule;
THE PROFIT-MAXIMISING RULE
Firms should produce that quantity of the product such that profits are maximised,
or losses minimised. Profit is maximised where marginal revenue (MR) is equal to
marginal cost (MC). (Draw diagram)
THE FIRM`S SUPPLY CURVE
Long run- Economic Profit
Long run- Economic loss
LONG RUN- EQUILIBRIUM