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perfect competition cheat sheet

Charac­ter­istics of Perfect compet­ition

large numbers of buyers and sellers
homogenous product (all perfect substi­tutes)
no barriers to entry or exit from this market
perfect knowle­dge­/in­for­mation between buyers and sellers
firms are profit maximisers (MC=MR)
firms are price takers
all firms are small


allocative efficiency
in both the short and long run, P=MC and thus allocative efficiency is achieved.
productive efficiency
ensuring the costs of production are as low as they can be
dynamic efficiency
in perfect compet­ition this will not be achieved.

Assump­tions of the model

homogenous products
perfect resource mobility
free entry to entry and exit
perfect / complete inform­ation
large number of firms

limita­tions of the model

unreal­istic assump­tions
limited possib­ilities to take advantage of economies of scale
firms cannot expand that much
lack of product variety
consumers do not have variety
waste of resources in the process of long-run adjustment
does not make enough money to invest in R & D
ignores market failures

short-run perfect compet­ition


only in the short-run, supern­ormal profits are achieved. It attracts new firms into the market

long-run perfect compet­ition

long-run equili­brium

In perfect compet­ition, no firm will make supern­ormal profits in the long run. This is because any short-term supern­ormal profits attract new firms to the market (since there are no barriers to entry). This means supern­ormal profits are ‘competed away’ in the long term — i.e. firms undercut each other until all firms make only normal profit.


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