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Perfect Competition
A hypothetical benchmark against which
to assess other market structures.
Actions of individual buyers and sellers
have no effect on the market price.
The relationship between marginal
revenue and price is the special feature of
perfect competition.
The horizontal demand curve is the crucial
feature of a perfectly competitive firm.
P
P
The firms
supply decision
in the short run.
P1 is the
shutdown price
below which the
firm fails to
cover variable
costs in the
short run. At all
prices above P1,
the firm chooses
output to make
P= SMC
LONG RUN
- each firm can vary all its factors of production,
but the number of firms can also change through
entry and exit
Break even or
normal profit
point
MC
ATC
MR3
P3
P2
MR2
P1
MR1
Shut down point
AVC
Q1
Q2
Q3
Long-run Equilibrium
With fewer firms left,
the industry supply curve
SS shifts to the left. With less
supply, the equilibrium price
rises. When enough firms have
left, and industry output falls
enough, higher prices allow
the new marginal firm to break
even, despite an upward shift
In LAC. Further incentives for
entry or exit disappears.