An industry with perfect competition displays the following characteristics:
Perfect competition arises:
The demand analysis in perfectly competitive markets is covered in Reading 14.
The supply analysis, optimal price and output, and long-run equilibrium in perfectly competitive markets are covered in Reading 16.
In perfect competition, each firm is a price taker. Price takers are sellers who must take the market price in order to sell their products.
This diagram represents the market demand and supply curve for a certain product - for example, eggs.
As usual, the intersection of the demand and supply curve creates the market price (P) per egg. Now remember that a firm that is a price taker can sell all it wants to at that price, but can sell nothing at a higher price.
Price takers can sell all their output at the market price, but they are unable to sell any of their output at a price higher than the market price. That is, a price taker faces a horizontal demand curve. Each firm's output is a perfect substitute for the output of the other firms, so the demand for each firm's output is perfectly elastic.
When a perfectly competitive market is in long-run equilibrium:
Why do firms earn zero economic profit in the long-run equilibrium?
|cp24: So at MR = MC the only profit will be normal profit?|
|Mine: In response to cp24s comment, yes the profit would be only normal profit at this point since there is no economic profit|
|uberstyle: No economic profit due to perfect competition. Existence of economic profit would lead to new entrants.|
| abhishekanand: In response to cp24, whether there is an economic profit will depend on whether at MR=MC, P(=MR)>ATC(Average total cost) or not. |
If P>ATC: economic profit(hence more than normal profit)
If P=ATC: 0 economic profit, just normal profit
If P<ATC: economic loss, not even normal profit.