Perfect Competition

Assumptions of the model

Describe, using examples, the assumed characteristics of perfect competition: a large number of firms; a homogeneous product; freedom of entry and exit; perfect information; perfect resource mobility - see pages 1 to 2 of the document '1.5. Perfect Competition'

Revenue curves

Explain, using a diagram, the shape of the perfectly competitive firm’s average revenue and marginal revenue curves, indicating that the assumptions of perfect competition imply that each firm is a price taker - see page 2 of the document '1.5. Perfect Competition'
Complete Qs 4 and 10 on pages 16-18 of the document '1.5. Perfect Competition'
Explain, using a diagram, that the perfectly competitive firm’s average revenue and marginal revenue curves are derived from market equilibrium for the industry - see page 2 of the document '1.5. Perfect Competition'

Profit maximization in the short run

Explain, using diagrams, that it is possible for a perfectly competitive firm to make economic profit (abnormal profit), normal profit (zero economic profit) or negative economic profit in the short run based on the marginal cost and marginal revenue profit maximization rule - see pages 3 to 11 of the document '1.5. Perfect Competition'

Shut-down price and break-even price

Distinguish between the short run shut-down price and the break-even price - see page 5 of the document '1.5. Perfect Competition'
Explain, using a diagram, when a loss-making firm would shut down in the short run - see page 5 of the document '1.5. Perfect Competition'
Explain, using a diagram, when a loss-making firm would shut down and exit the market in the long run - see page 6 of the document '1.5. Perfect Competition'
Calculate the short run shutdown price and the breakeven price from a set of data - complete Qs 3 to 7 on pages 7 & 8 of the document '1.5. Perfect Competition'

Profit maximization in the long run

Explain, using a diagram, why,in the long run, a perfectly competitive firm will make normal profit (zero economic profit) - see pages 9 to 10 of the document '1.5. Perfect Competition'
Complete Qs 8 & 9 on page 8 of the document '1.5. Perfect Competition'
Explain, using a diagram, how a perfectly competitive market will move from short-run equilibrium to long-run equilibrium -see pages 10 to 13 of the document '1.5. Perfect Competition'
Complete Qs 10 to 15 on page 14 of the document '1.5. Perfect Competition'

Demand, MR and Profit

From short-run to long-run in Perfect Competition

Efficiency

Explain the meaning of the term allocative efficiency - see page 15 of the document '1.5. Perfect Competition'
Explain that the condition for allocative efficiency is P = MC (or, with externalities, MSB = MSC) - see page 15 of the document '1.5. Perfect Competition'
Explain, using a diagram, why a perfectly competitive market leads to allocative efficiency in both the short run and the long run - see pages 15-16 of the document '1.5. Perfect Competition'

Explain the meaning of the term productive/technical efficiency - see page 15 of the document '1.5. Perfect Competition'
Explain that the condition for productive efficiency is that production takes place at minimum average total cost - see page 15 of the document '1.5. Perfect Competition'
Explain, using a diagram, why a perfectly competitive firm will be productively efficient in the long run, though not necessarily in the short run - see pages 16-18 of the document '1.5. Perfect Competition'

Files to download

1.5.Perfect Competition.docx

firms_competitive.ppt