Theory question 106
Market Structures(a) State three characteristics of perfect competition.
(b) With the aid of diagrams, explain the equilibrium positions of a perfectly competitive firm in the: (i) short-run; (ii) long-run
Show the model answer
(a) Any three: many buyers and sellers; homogeneous product; free entry and exit; perfect knowledge; perfect mobility of factors; firms are price takers; no transport costs.
(b)(i) Short run: equilibrium where MC = MR (= AR = price) with MC rising. If AR is above ATC at that output the firm earns supernormal profit (shaded rectangle); if below ATC it makes a loss (but continues if price covers AVC).
(ii) Long run: free entry/exit removes supernormal profit or losses; equilibrium where MC = MR = AR = minimum ATC, so the firm earns only normal profit. Diagrams show the horizontal AR = MR line, U-shaped MC and ATC curves, and the equilibrium output.
In the long run, P = MR = MC = minimum AC.